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Is Milton Friedman a Fascist? 

Yes, says William F* Buckley, Jr. •♦♦ 

"It is possible that Milton Friedman's policies suffer from the 
overriding disqualification that they simply cannot get a suffi- 
cient exercise in democratic situations." 

William F. Buckley, Jr. 

Arthur Laffer... 

"You want to prove that Milton Friedman is a fascist? It's easy. 
Quote him." 

Arthur Laffer, economist 

and Milton Friedman. 

"The object of such controls (on wages, prices, and credit) is 

the restriction of spending on the part of individuals Such a 

policy, if rigorously enforced, should restrain a rise in the price 
level. This policy appeared to have been successful in Nazi 

Milton Friedman, 
Studies in the Quantity Theory of Money 

JhJ $395 
dJTli. FRANKLIN HOUSE ISBN: 0-933488-09-2 





















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i^ Lyndon H. LaRoucheJr David P Goldman 





Lyndon H. LaRouche, Jr David P Goldman 

Is Milton Friedman a Fascist ? 

Yes, says William F. Buckley, Jr. 

"It iq nn^ihle that Miltnn Friedman's nolicies suffer from 

♦ ♦ ♦♦ 

"It is possible that Milton Friedman's policies suffer from the 
overriding disqualification that they simply cannot get a suffi- 
cient exercise in democratic situations." 

William F. Buckley, Jr. 

Arthur Laf f er 


"You want to prove that Milton Friedman is a fascist? It's easy. 

Quote him." 

Arthur Laffer, economist 

and Milton Friedman. 

"The object of such controls (on wages, prices, and credit) is 
the restriction of spending on the part of individuals.. . . Such a 
policy, if rigorously enforced, should restrain a rise in the price 
level. This policy appeared to have been successful in Nazi 

Milton Friedman, 
Studies in the Quantity Theory of Money 

£ Y\~ .11 $3.95 
J3fe: FRANKLIN HOUSE ISBN: 0-933488-09-2 

Truth About 
Milton Friedman 

by Lyndon H. LaRouche, Jr. 
and David P. Goldman 

The New Benjamin Franklin House 
New York 

Milton Friedman 

The Ugly Truth About Milton Friedman 
Copyright® 1980 by Lyndon H. LaRouche, Jr. and 
David P. Goldman 


For information address the publisher: 
New Benjamin Franklin House 
Publishing Company, Inc. 
304 West 58th St. 
New York 10019 

Library of Congress Cataloging in Publication Data 
Goldman, David P. 

Milton Friedman — The Ugly Truth About Milton 

Includes index. 

1 . Chicago School of Economics. 2. Friedman, 
Milton, 1912- 3. Economics. I. LaRouche, Lyndon 
H., joint author. II. Title. 

HB98.3.G64 330'.092'4 80-20623 

ISBN 0-933488-09-2 

Cover and text design: James Montalbano 
Cover photographs: Wide World Photos 


To Jacques Rueff 
In memoriam 


The authors drew extensively from unpublished research 
drafts prepared by their collaborators at the Executive 
Intelligence Review, including exhaustive work by Kathy 
Burdman on the history of monetarism, and by Alice 
Roth, James Cleary, Carol Cleary, Susan Cohen, Rich- 
ard Schulman, and Laurie Sloan among others. 

The authors wish to thank Miss May Wu of the 
Lehrman Institute Library for the use of prepublication 
drafts of translations of Jacques Rueff 's work, from the 
Institute's forthcoming publication of Rueff's complete 
works in English, and also thank our editor at Benjamin 
Franklin House, Linda de Hoyos. 


Introduction: Friedman Is a Hoax ... 1 

1. What Is Fascist Economics? 19 

2. Rueff versus Friedman 61 

3. The Fraud of Free Enterprise . , , 93 

4. Oxford Monetarism and 

Hitler's Vienna 141 

5. Monetarism Invades America 169 

6. The Undead of Economics 207 

7. The Worst Economist in the World . . 231 

8. The Basis of Real Economics 275 

Appendix: Interview with 
Milton Friedman on the 
Phil Donahue Show 305 

Notes 323 

Index 339 


Figure 1 Manufacturing output versus energy flux 

density, 1954-1977 
Figure 2 U.S. employment 
Figure 3 Israeli exports and imports 
Figure 4 Israeli inflation 
Figure 5 Israeli balance of payments 
Figure 6 Productivity and total debt 
Figure 7 Reinvested profit since 1970 
Figure 8 Free-energy ratio of the U.S. economy since 

Figure 9 Phase diagram of an economy 
Figure 10 Productive fixed investment 
Figure 11 Apparent energy efficiency in the U.S. 

Figure 12 Actual energy efficiency in the U.S. 

Figure 13 Nominal West German energy efficiency 
Figure 14 Surplus available for productive investment 

(current trends) 
Figure 15 Surplus available for productive investment 

(minimal survival conditions) 
Figure 16 Free-energy ratio S'/(C+V) (minimal 

survival conditions) 


Between pages 140 and 141 

Milton Friedman 
Is a Hoax 

Mr. Friedman can absolutely be counted upon to 
say that his theories were not given an adequate 
exercise. There is no doubting that he is correct. 
But it is possible that his theories suffer from the 
overriding disqualification that they simply cannot 
get a sufficient exercise in democratic situations — 
because it takes longer for them to produce results 
than the public is prepared to wait. 

— William F. Buckley, Jr., in National Review, 
August 16, 1971 

Milton Friedman's good repute among American con- 
servatives is the result of a monstrous hoax. Now that 
Federal Reserve Chairman Paul Volcker has thrown the 
U.S. economy into a 1930s-level of depression by apply- 
ing Friedman's monetary theories, and Ronald Reagan 
has embraced Friedman and his associates as advisers, 
Americans have two alternatives: either we will destroy 
the hoax, or the hoax will destroy us. 

2 The Ugly Truth About Milton Friedman 

Television viewers have heard Friedman's slick pitch 
on the recent public television series, Free To Choose, 
but they do not know the record of the man speaking. 
We will show, for example, that Friedman's role in 
General Pinochet's dictatorship in Chile was no side 
issue blown out of proportion by left-leaning oppo- 
nents, but typical of the man's behavior for the last four 
decades. In particular, we will show that Friedman is no 
"American conservative," but the instrument of the 
remnants of the old Hapsburg aristocracy. What Fried- 
man passes off as economics is, in reality, the theory 
that we fought the American Revolution to free the 
colonies from: the antigrowth doctrine of the British 
East India Company. 

Milton Friedman's record makes his salesmanship for 
"free enterprise" over public television seem altogether 
less impressive. 

Friedman is the international traveler who ordered 
the Chile dictatorship to reduce the consumption of its 
population in 1976, when average per capita food 
consumption was then the same as it had been in 
Hitler's concentration camps. He did so in the South 
American public press, as a matter of record — and then 
lied to American audiences about his true role in Chile 
after he was caught at it. 

He is also the adviser to the Margaret Thatcher 
government in Great Britain, who turned that long- 
suffering nation into what is now called a "Once 
Industrialized Country," in the phrase of the London 
Sunday Times. Friedman's dictates to Britain, presented 
over British television and visits to 10 Downing Street, 
managed to raise that country's rate of inflation by a 
factor of four, from 6 percent to 22 percent a year, in 
the year since Thatcher took office. At the same time, 

Friedman Is a Hoax 3 

Britain's industrial production fell 8 percent, and British 
living standards fell by a sharper margin than during 
the 1930s. 

This is the "monetarist experiment" that Friedman 
wants to impose on the United States. 

Finally, Friedman is the Republican Party adviser 
who steered Richard Nixon and Gerald Ford into 
economic blunders that weakened the U.S. economy. 
He urged Richard Nixon into a disastrous money 
crunch in 1969, throwing the economy into recession 
and forcing the United States to sever the dollar's link 
to gold, an action Friedman had lobbied for. The 
abandonment of the gold standard has produced more 
inflation than any other American policy error. His 
friends William Simon and Alan Greenspan misled 
President Gerald Ford into the "whip inflation" morass 
that brought on the 1974-1975 recession and cost Ford 
the 1976 election. 

Last and worst, Friedman is the adviser who per- 
suaded Richard Nixon to forgo the draft in favor of the 
All-Volunteer Army. The result is that America now 
has an army 40 percent of whose soldiers are illiterate, 
and the majority of whom are chronic drug abusers. 
That should not bother Friedman; he has been demand- 
ing the legalization of all drugs, including heroin, since 
1972. But he bears personal responsibility for undermin- 
ing America's national security in a way the Soviet 
Union could never dream of doing. 

Americans should have smelled a rat when Friedman 
began advocating marijuana decriminalization three 
years ago, and become more outraged when he de- 
manded the legalization of heroin. In a television inter- 
view on April 15, 1980, Friedman declared: 

"Even if on ethical principles, you believe it is right 

4 The Vgly Truth About Milton Friedman 

to prevent somebody else from smoking marijuana, as 
a matter of expedience, it's a terrible mistake. ... I 
mean, it's a terrible mistake for society to render heroin 
illegal because that increases the harm which heroin 
does. . . . Why is heroin so expensive? Because it's il- 

Accordingly, in his 1980 book Free to Choose, Fried- 
man promotes Hong Kong, the world's opium capital, 
as the model for his version of "free enterprise." Fried- 
man wrote: 

"In today's world big government seems pervasive. 
We may well ask whether there exist any contempora- 
neous examples of societies that rely primarily on 
voluntary exchange through the market to organize 
their economic activity and in which government is 
limited. . . . Perhaps the best example is Hong Kong— a 
speck of land next to mainland China containing less 
than 400 square miles with a population of roughly 4.5 
million people. Hong Kong has no tariffs or other 
restraints on international trade. ... It has no govern- 
ment direction of economic activity, no minimum wage 
law, no fixing of prices. ... It is somewhat ironic that 
Hong Kong, a Crown Colony of Great Britain, should 
be the modern exemplar of free markets and limited 
government." 1 

Hong Kong also pulls in $10 billion a year in 
revenues from the illegal heroin traffic, has one fifth of 
its population addicted to heroin, and boasts a $1 
billion a year police bribery rate — more than the entire 
police budget — and has more prostitutes, pickpockets, 
muggers, and dope pushers per capita than any city in 
the world. Hong Kong's $10 billion annual take from 
the dope traffic is twice the size of the island's money 

Friedman Is a Hoax 5 

supply. 2 To be sure, Hong Kong has no restraints on 
"international trade." According to every U.S. govern- 
ment agency and congressional investigation of the 
heroin traffic during the last fifteen years, Hong Kong 
is not only the center of the world's dope trade. It is 
also the center for financing opium production under 
the aegis of the Hongkong and Shanghai Bank, the 
island's central bank and the issue bank of its legal 
tender currency, the Hong Kong dollar. The Hongkong 
and Shanghai Bank is so notoriously corrupt that the 
New York State Banking Department refused to give it 
permission to buy a New York state bank, Marine 
Midland, in 1979 — despite urgent pressure from the 
Carter administration. Hongkong and Shanghai moved 
into New York only after Carter's Treasury overruled 
the New York authorities. 3 

As Kalimtgis, Goldman, and Steinberg reported in 
the 1978 bestseller Dope, Inc., Hong Kong's economy is 
not merely linked to the dope trade — it is the dope 
trade. Friedman did not mention that in his television 
broadcast from the island. Nor did he mention his role 
in an elite, secretive organization known as the Mont 
Pelerin Society, which met privately in Hong Kong in 

Friedman has furthermore admitted, without the least 
sign of embarrassment, that his economic doctrines are 
a resurrection of those of Nazi Economics Minister 
Hjalmar Schacht. He endorsed Schacht's doctrines as 
applied to the 1930s German economy in his 1956 book 
Studies in the Quantity Theory of Money, and repeated 
his admiration for Schacht in the course of a 1978 radio 
interview in Atlanta, Georgia. 

This tells us precisely who and what Milton Friedman 

6 The Ugly Truth About Milton Friedman 

is. Of course, he did not sell himself to the Nobel Prize 
Committee all on his own. The hoax, known genteelly 
as "liberal economics," goes far beyond Friedman. On 
the record, Friedman cites his "free market" predeces- 
sors to be Adam Smith, David Ricardo, Jeremy Ben- 
tham, and John Stuart Mill. Every one of these individ- 
uals was a senior official of the British East India 
Company, which was conducting the aboveboard op- 
ium trade as the world's biggest business. Smith drew 
up the Company's plans for expansion into the great 
Chinese market; Ricardo sat on its board of directors; 
Bentham published the Company's official history; and 
Mill was chief of East India Company intelligence 
during the first Opium War. 

Jeremy Bentham not only founded Friedman's school 
of monetarism, but also Friedman's gutter morality, 
known as "philosophical radicalism." Bentham ex- 
pressed this in treatises in defense of usury, pederasty, 
and other forms of "libertarianism." 

That is the philosophical radicalism that Friedman 
embraces in his 1962 book, Capitalism and Freedom: 

"To the free man, the country is the collection of 
individuals who compose it, not something over and 
above them. ... He recognizes no national goal except 
as it is the consensus of the goals that the citizens 
severally serve. He recognizes no national purpose 
except as it is the consensus of the purposes for which 
the citizens severally strive." 

With this statement, Friedman has repudiated the 
principles of the United States Constitution in favor of 
the ideology of the British Empire builders who were 
bent upon destroying the young American republic. 

Friedman Is a Hoax 7 

Friedman then continues to define his brand of 
"politics": "It is extremely convenient to have a label 
for the political and economic viewpoint elaborated in 
this book. The rightful and proper label is 
liberalism. . . . Liberalism has, in the United States, 
come to have a very different meaning than it did in the 
nineteenth century or does today over much of the 
continent of Europe. . . . Because of the corruption of 
the term liberalism, the views that formerly went under 
that name are now often labeled conservatism. But 
this is not a satisfactory alternative. The nineteenth- 
century liberal was a radical, both in the etymological 
sense of going to the root of the matter, and in the 
political sense of favoring major changes in social 
institutions. So must be his modern heir." 4 

Yet, many conservatives — themselves committed to 
America's national purpose of economic and scientific 
development — continue to be duped by Friedman's 
lectures. There are three noteworthy ingredients in 
Friedman's presentation that work to perpetrate the 

First, Friedman repeatedly stresses specific issues that 
are real issues in the experience of most of his credulous 

Second, he uses homilies of a sort that appear plausi- 
ble to his viewers, at least as long as the viewers are 
sufficiently ignorant of the ABCs of economics not to 
recognize the fraud involved. 

Third, he reinforces the favorable impression pro- 
duced by his time-tested lectern homilies by resort to 
wild lies, such as the lies we have identified in connec- 
tion with Pinochet's Chile and the Hong Kong market. 

8 The Ugly Truth About Milton Friedman 

Friedman's rhetorical gifts are often admitted by his 
critics; the actual talent is a knack for unsettling the 
listener's belief in causality. 

As Harvard Keynesian Paul Samuelson, the author 
of a standard textbook, commented on Friedman's 
habits: "Now I don't think Milton is a charlatan. He 
believes what he says at any time he says it. But he also 
has a very healthy respect for his audience. If you are a 
yokel, he gives you a hokum answer. If he is giving his 
presidential address [in his capacity as American Eco- 
nomic Association president], he states it more guard- 
edly and more carefully. It is a matter of the style of the 
person." 5 

But Friedman never discusses actual economics. 
Therefore, as long as credulous viewers remain blind to 
the fact that Friedman never discusses actual economics, 
they tend to be hoodwinked into believing that Fried- 
man is an economist. The effect is like the case of the 
pitchman's shell game, in which the suckers have been 
induced to forget all about the pea. The "pea" — actual 
economics — simply never appears. The credulous ad- 
mirer of con man Friedman foolishly assumes that the 
"clever Friedman" has control of a "pea," which, in 
fact, never existed in that particular game. 

In salesman's lingo, Friedman's economics is all 
"sizzle," without any distracting presence of "steak." 

Thus Friedman "makes outrageous statements he 
doesn't believe and proposes policies that could never 
be carried out," Yale economist James Tobin com- 
plained during Friedman's tenure as economic adviser 
to the 1964 Goldwater campaign. Most of us occasion- 
ally get mad enough to say stupid things such as, 
"throw all the welfare bums into the street," or "I'm 

Friedman Is a Hoax 9 

going to shoot that s.o.b. brother-in-law of mine," and 
so forth, without really believing them. But Milton 
Friedman, Nobel Prize winner and respected economist, 
is there to tell us that we are correct to make outra- 
geously stupid statements! 

Take his column in Newsweek magazine of March 24, 
1980. He begins with an accurate statement: "President 
Carter's anti-inflation program is another in a long 
series of cosmetic measures designed more to quiet 
public outcry than to resolve our serious economic 
problems. That problem has two faces: inflation and 
declining productivity. Inflation has discouraged pro- 
ductive investment and fostered economic inefficiency. 
Declining productivity has contributed to inflation. We 
badly need a coordinated attack on both inflation and 
declining productivity." But Friedman concludes: 
"President Carter has not proposed a meaningful cut in 
spending. He has simply proposed a slightly smaller 
increase. We should be considering cuts of $60 billion 
to $100 billion in fiscal 1981 projected spending, not $14 

What does Friedman want to cut from the budget? 
Cutting $100 billion means — as anyone would realize 
after a moment's thought — elimination of social secu- 
rity payments, elimination of welfare payments, veter- 
ans pay, and half the income support systems of the 
federal government. That means the murder of useless 
eaters on the Hitler model. No one is speaking hypo- 
thetically. Friedman's collaborators in the California 
tax revolt movement propose seriously that the unem- 
ployed should apply to local charities, that school can 
be taught in home basements, and that social services 
are superfluous in general. 

10 The Ugly Truth About Milton Friedman 

Does Friedman himself propose to murder some tens 
of millions of "useless eaters"? He merely wants to cut 
$100 billion from the budget. 

Ending the phony debate 

The time has come to stop using the despicable John 
Maynard Keynes as an excuse to tolerate Milton Fried- 
man. We have not forgotten that Keynes, too, admired 
Hjalmar Schacht, and wrote in his introduction to the 
1936 German-language edition of his General Theory 
that Germany's political system, under Schacht and 
Hitler, was ideally suited for the exercise of Keynes's 

We shall show in chapters ahead how interchangeable 
are the Keynesian and Friedmanite varieties of Ben- 
thamite "liberalism." Stanford University's Hoover In- 
stitution, Friedman's current place of employment and 
the front-ranking think tank for the Reagan presidential 
campaign, is stocked with both "conservative liberals" 
like Friedman and economist Martin Anderson, and 
"liberal liberals" like New York University's superan- 
nuated Marxist Sidney Hook. 

The University of Chicago, home of Friedman's own 
teachers, was put in place as a project of Britain's 
socialist Fabian Society. The careers of two close 
friends, Friedman and his Chicago classmate Abba 
Lerner, demonstrate how identical the liberals are. 
Lerner, now a professor at Queens College in New 
York and one of America's leading Keynesians, is an 
unashamed totalitarian. In a debate with LaRouche on 
the Queens College campus in October 1974, Lerner 

Friedman Is a Hoax 11 

passionately defended Nazi Hjalmar Schacht as a "great 
economist" whose economic policies should be viewed 
in isolation from Hitler's political approach — the same 
case that Friedman makes for Chile's Pinochet. 

In 1946 Lerner published a treatise entitled The 
Economics of Control, advocating an explicitly totalitar- 
ian economy in which the state controls each facet of 
economic life. It was Milton Friedman who argued that 
Lerner's totalitarianism was only the mirror image of 
his own economics, that "totalitarian direction might 
achieve the same allocation of resources as a free price 
system," and achieve "a reasonable approximation of 
the economic optimum." 6 Friedman, in a published 
review of Lerner's book, gently chided his old college 
friend for underrating "the administrative problems of 
economic institutions," while insisting that the eco- 
nomic content of his and Lerner's proposals was indis- 

Abba Lerner was prominently associated with the 
Initiatives Committee for National Economic Planning 
(ICNEP), a group of liberal economists headed by 
Milton Friedman's wartime supervisor, Wassily Leon- 
tief. At a 1975 press conference in New York City, 
Leontief and Challenge magazine editor Myron E. 
Sharpe distributed as their chief ICNEP policy docu- 
ment an article entitled, "The Coming Corporativism," 
published in Challenge's March-April 1975 issue. "Cor- 
porativism" was Mussolini's phrase for his version of 
fascist economics. The authors of the policy paper, two 
British sociologists, stated: "What the parties are put- 
ting forward now is an acceptable face of fascism; 
because so far the more repugnant political and social 
aspects of the German and Italian regimes are absent or 

12 The Ugly Truth About Milton Friedman 

present in diluted form. For consumers, there is bound to 
be a noticeable drop in living standards. . . . Investment 
controls will certainly eliminate some of the trivia, 
gimmicks, and baubles of contemporary life, and prob- 
ably a number of the joys as well." (emphasis added) 

That is the sordid content of Milton Friedman's 
agreement with Abba Lerner. 

The authors' qualifications 

From the vantage point of the body of economic science 
available to America's founding fathers and to the 
Lincoln administration, Friedman's work is instantly 
recognizable as outright quackery. Economic science, 
as it was understood by George Washington's Treasury 
Secretary Alexander Hamilton, has a 2000-year history 
as the Queen of Sciences. It is the mastery of the means 
by which human society transforms nature to advance 
humanity. At bottom, only an audience deprived of 
knowledge of the ABCs of real economics will tolerate 
a Milton Friedman. 

Lyndon LaRouche and his associates are not merely 
the continuation of that body of science, known 
throughout the nineteenth century as the "American 
System," but the originators of the most important 
advances in that science since the work of Alexander 
Hamilton. Among the world's leading policy-making 
circles and in Europe's public press, LaRouche is rec- 
ognized as the "intellectual author" of the 1978 creation 
of the European Monetary System, the most important 
breakthrough in the field of public policy since the last 
war. The European Monetary System is the launching- 

Friedman Is a Hoax 13 

pad for a system of gold-backed credit for the indus- 
trialization of the underdeveloped countries, and the 
cornerstone for what could be the greatest economic 
boom in history. 

LaRouche shares responsibility for the architecture of 
the new monetary system with the late Jacques Rueff, 
President Charles de Gaulle's gifted economist, to 
whom we dedicate this volume. Although Rueff s think- 
ing was not parallel to ours on every issue, he was the 
heir to the economic tradition of Benjamin Franklin's 
collaborators in France, the great economists and phys- 
icists of the Ecole Polytechnique. Over a writing and 
public service career spanning six decades, Rueff fought 
for the idea that economics and physics are the same 
science, and that human society's ability to command 
nature in the form of economic science is the starting 
point of all physical science. A life-long associate of the 
great physicist Louis de Broglie, Rueff rose to interna- 
tional prominence as the economist of de Gaulle's 
economic miracle. Throughout the 1960s and 1970s, 
Rueff was the European antipode to Milton Friedman's 
proposal to reduce the international monetary system 
to "free market" chaos. When he met LaRouche in 
Paris in 1976, three years before his death, Rueff shared 
with LaRouche basic agreement on the content of the 
international monetary system that would emerge with 
the July 1978 Bonn agreement to create the European 
Monetary System. 

Beyond this public policy role, LaRouche contributed 
a fundamental advance in the field of theoretical eco- 
nomics, making possible the application of American 
System principles to precise quantitative models of 
economic behavior. Alexander Hamilton had formu- 

14 The Ugly Truth About Milton Friedman __ 

lated the essential standpoint of the city-building school 
of economics in his 1791 Report to Congress on the 
Subject of Manufactures: the only measure of wealth is 
the increase in the productivity of labor, as a measure of 
man's command over nature. Smith, Ricardo, and the 
French physiocrats had described wealth as a collection 
of objects given by nature, fixed in character, and 
valued according to their scarcity (or according to the 
scarcity of the labor required to produce them, the so- 
called classical labor theory of value). Hamilton dem- 
onstrated that particular objects of wealth have value 
only as they contribute to increases in society's ability 
to create new value; the invariant measure of economic 
life is the rate of increase of the productivity of labor. 

Friedman and the Keynesians concur in constructing 
"deterministic" mathematical models with the vicious 
prejudice that the productivity of labor is held fixed, or 
that the real economy is intentionally excluded from the 
system, as in Friedman's "monetary model." Since their 
models enhanced these economists' morbidly anti- 
growth outlook, the economics profession saw no prob- 
lem here. 

The fundamental problem of deterministic models, 
which all the monetarists ignored, is to make the 
productivity of labor — that is, the rate at which the 
economy integrates new scientific advances — the primary 
subject of investigation. The current prices of capital, 
consumption goods, and labor are derivative, continu- 
ously revalued as their contribution to an advancing 
economy changes. 

In the early 1950s, LaRouche solved this problem of 
deterministic models in theory, by applying the great 
mathematical advances of the Gottingen school of 
nineteenth-century German scientists, principally Bern- 

Friedman Is a Hoax 15 

hard Riemann and Georg Cantor. Riemann and Can- 
tor's work, the basis for modern mathematical physics, 
treats discontinuous change as the primary subject of 
mathematical investigation. Applied first to self- 
ordering physical processes in which higher levels of 
energy flow lead to higher-order geometries of physical 
organization, the Riemann method provided the neces- 
sary tools for the American System economic model. 

LaRouche's method was realized in the form of a 
computer-based econometric model of the U.S. and 
other economies. Since its development in 1978, the 
LaRouche-Riemann model has proved to be the only 
successful predictive tool among the available computer 
models; but it is also a powerful tool for development 
planning. An application of the LaRouche-Riemann 
model to the problems of the development of India, 
published in the spring of 1980, attracted major inter- 
national attention, and has already had a profound 
impact on development planning throughout the devel- 
oping world. 

The authors employed this unique advance in eco- 
nomic science to predict with great precision what the 
adoption of Milton Friedman's policies would do to the 
U.S. economy. 

On October 9, 1979, Federal Reserve Chairman Paul 
Volcker announced that henceforward monetary policy 
would be conducted on Friedman's principles of stem- 
ming inflation through fiscal austerity. The LaRouche- 
Riemann model predicted that by the end of the year 
1980, the Volcker measures would force a 15 percent 
drop in production. That projection has been com- 
pletely borne out. 

The Volcker policy has single-mindedly been commit- 
ted to the purpose to uphold the mass of debt held by 

16 The Ugly Truth A bout Milton Friedman 

lower Manhattan and London and the federal govern- 
ment debt — at the expense of the productive economy. 
This is the same perspective as Adam Smith's, and is 
completely opposite to that of Alexander Hamilton. 

Hamilton demonstrated that the single source of 
national wealth was the increase of productive skills of 
the citizenry. There is little question that today, without 
a major increase in our national productivity, this 
nation will die. 

At the conclusion of this work, we will report the 
results of an authoritative computer economic analysis 
conducted by the authors demonstrating that a 3 per- 
cent annual rise in real social productivity is the mini- 
mum survival condition of the U.S. economy. Contrary 
to the fanatical delusions of Georgetown University and 
the Hoover Institution, no "Big Brother" seated at the 
control panel will be able to effect the required increase 
in productivity — which these men perceive to be neces- 
sary for a successful military build-up. Our continued 
existence as a nation hangs on the ability of our best 
citizens to mobilize the American population for sci- 
ence, on a scale far exceeding the enthusiasm for the 
NASA space program following the Russians' launch- 
ing of Sputnik in 1957. 

Real economics is first and foremost the science of 
the moral capabilities of the citizens of a republic. That 
is the lesson of the survival of the early republic under 
the economic guidelines set forth by Alexander Hamil- 
ton, the emergence of the United States as a great 
industrial power as a result of the policies of Abraham 
Lincoln, and the mobilization for World War II that 
pulled us out of depression in this century. 

Friedman Is a Hoax 17 

The same quality of mobilization must occur today — 
in opposition to the moral indifferentism of Milton 
Friedman et al. Our present generation of youth must 
find the moral resources to reject the countercultural 
hedonism that has already come close to destroying it, 
and become educated as the scientists, engineers, teach- 
ers, and skilled workers who will rebuild our economy. 
Nations do not stumble into productivity growth. This 
economic phenomenon takes place when entire popula- 
tions raise their qualifications to produce the scientists, 
engineers, and skilled personnel required for the future. 

There is no difference between the brutalized sheep of 
Lerner's "controlled economy," and the gratification- 
seeking hedonist of Bentham and Friedman. The citizen 
who is a docile sheep with respect to his responsibilities 
as a citizen will be a bestial hedonist in "private life." 
That the majority of the American population currently 
behaves in this fashion thins our prospects for continued 
national existence down to a slim margin. 

By morality, we are not speaking of such nonsense as 
the "work ethic," but of the notion of causality, the 
fundamental principle of science. What is morality but 
a determination to judge the consequences of one's 
actions in the real world? 

Milton Friedman is a moral obscenity, but his popu- 
larity is even more obscene. Whether or not Americans 
continue to tolerate him will say a great deal about 
whether America has the moral fitness to survive. 

Lyndon H. LaRouche, Jr. 

David P. Goldman 

July 23, 1980 

What Is 
Economics ? 

You want to prove that Milton Friedman is a 
fascist? It's easy. Quote him. 

—Prof. Arthur B. Laffer of the University of 
Southern California, in conversation with the 

Milton Friedman's public record defense of Nazi Eco- 
nomics Minister Hjalmar Schacht and his eerie justifi- 
cation of Hitler's economic methods published twenty- 
five years ago should have set off alarms in the minds of 
his readers. Statements of this nature are more than a 
reflection of the man's character. Fascist economics is 
the ultimate response, or "final solution," for an econ- 
omy that monetarist mismanagement has thrown into 
apparently hopeless crisis. There is a thin line between 
monetarism in general and fascist economics as such. 
Among the leading monetarists, Friedman is the one 
with the least compunction about crossing that line. 

Germany's economic breakdown crisis in 1933 was 
not, in fundamentals, far different from what the United 

20 The Ugly Truth About Milton Friedman 

States is experiencing now. Nine years before the great 
1931 international economic crisis, Hjalmar Schacht 
had performed the misnamed "miracle" of ending the 
great hyperinflation of the early 1920s. What Schacht 
had in fact done was to negotiate credits from his friend 
Montagu Norman, the governor of the Bank of Eng- 
land, in return for handing over the German economy 
to London, Germany stopped investing in industry by 
written agreement with its British creditors and became 
a speculative fairground for short-term British capital. 
The international monetary crisis of 1931 brought the 
German economy down, and Hitler's SS became the 
bill-collectors for Germany's delinquent account, before 
it struck them that they could do some collecting on 
their own. 

Nine years ago, the Nixon administration took 
Milton Friedman's advice and removed the link between 
the dollar and gold. The August 15, 1971 monetary 
debacle turned the American economy into a speculative 
fairground for the City of London, The devalued dollar 
ceased to be a vehicle for productive investment, and 
hundreds of billions of dollars piled up in the City of 
London, in the so-called Eurodollar market. Now val- 
ued at $1.2 trillion, larger than the U.S. money supply, 
the Eurodollar market is the primary cause of double- 
digit inflation in the United States. 

Federal Reserve Chairman Paul Volcker, the Under- 
secretary of Treasury who fought for the end of the 
dollar-gold link in 1971, took Milton Friedman's advice 
once again in October 1979. Instead of concerning 
himself with interest rates in the future, Volcker an- 
nounced in what the press called "the Saturday Night 

What Is Fascist Economics? 21 

Massacre" that the Federal Reserve would hold down 
the rate of growth of the money supply — period. 

Now the American economy is suffering not merely a 
terrifying 15 percent per annum rate of decline of 
tangible output, but a massive financial crisis at the 
same time. Instead of the $40 billion deficit this fiscal 
year and the $16 billion surplus next fiscal year forecast 
in March by the Carter administration, the Treasury 
now officially projects a $100 billion deficit in the two 
fiscal years, not counting an additional $80 billion in 
so-called off-budget borrowing. In the official estimate 
of the White House, America cannot "afford" a recov- 
ery without a huge reduction in consumption. 

America, like Germany in the 1930s, is undergoing a 
monetary crisis, but the monetary crisis is the form of a 
crisis in the underlying physical economy. Since approx- 
imately 1967, America's investment in both capital 
goods and labor has been insufficient merely to replen- 
ish our existing capital stock and skilled labor pool. The 
authors conducted a survey through the Executive Intel- 
ligence Review demonstrating that per annum capital 
investment was $50 billion short of the annual deprecia- 
tion requirements of industry in 1979; the condition of 
the American labor force is a national scandal. Since 
1971, the financial flow of capital has been concentrated 
into nonproductive, often speculative investment, under 
the policy slogan "post-industrial society." The rate of 
growth of demands for income in the form of debt 
service in the nation's economy (and internationally) 
has become an inflationary cancer, outstripping the 
economy's ability to produce real profit in the form of 
a surplus of tangible wealth. 

22 The Ugly Truth About Milton Friedman 

Monetarist economics invariably produces such crises 
by suppressing capital investment. At the point of crisis, 
the choices available are only two: Either the economy 
undergoes general financial reorganization in favor of 
relaunching the economy's productive potential, the 
solution associated with LaRouche and Jacques Rueff; 
or the economy must be cannibalized to protect the 
failing financial structure. Since the second option 
requires political methods that, as William F. Buckley 
said in 1971, "cannot get a sufficient exercise in demo- 
cratic situations," we call that option by its German and 
Italian name: fascism. 

Hjalmar Schacht did more or less exactly what Paul 
Volcker, under Milton Friedman's guidance, is doing 
now: impose a regime of "fiscal austerity" on the 
German economy, crush consumption, and maintain 
tight conditions on the credit markets. Neither Schacht 
nor his admirer Friedman makes an attempt to halt 
inflation. Their method is this: If, for example, there is 
an annual 10 percent inflation, then the economy must 
make up for that inflation by gouging an additional 10 
percent each year out of the flesh and bone of the 
productive economy. 

The analogy to this sort of method is given by the 
case of a loan-sharking victim. In a hypothetical case, 
illustrating the general principle encountered, a person 
with $20,000 earned income incurs $5,000 in debt service 
payment obligations to a loan shark. Unable to pay all 
of the $5,000, the victim "refinances" $2,000 of the debt 
service payment at 50 percent effective annual interest. 
He pays the $1,000 instead of the $2,000 portion of the 
$5,000; a total of $4,000. The following year, he owes 

What Is Fascist Economics? 23 

$6,000 in current debt service, instead of $5,000. The 
next year $7,000, and so forth. 

That is Schacht's, and Friedman's, "monetarist" ap- 
proach to "fighting inflation." That is the fascist eco- 
nomics policy Friedman applied to Chile under the 
Pinochet dictatorship — a dictatorship now contemplat- 
ing ways for cutting out the growing ratio of "useless 
eaters" among its citizens. 

What drives fascist economies in practice is the 
political economy of military power. Physically depleted 
economies are hollow shells from a military vantage 
point. A nation's capacity for warfighting in depth 
depends on its ability to deploy productive resources for 
military purposes. A healthy economy can afford even 
extraordinary levels of military expenditure; during the 
Second World War American home consumption ac- 
tually rose, despite the enormous cost of military pro- 
duction and diversion of manpower into the armed 
services. Military production as such tends to expand 
the capital goods industries that are essential for im- 
proving the national stock of fixed capital, creating a 
"productivity spinoff that benefits the civilian sector. 
That is also the experience, for example, of the National 
Aeronautics and Space Administration. 

However, an economy depleted by Friedmanite 
methods cannot sustain military production in depth; it 
must rely on shallow "in-width" military production 
and blitzkrieg methods of war fighting. Fascist econ- 
omies simultaneously loot their own productive base, 
while devoting massive amounts of resources to war- 
autarky expenditures. To ensure that "energy autarky" 
and military programs receive first access to limited 

24 The Ugly Truth About Milton Friedman 

supplies of credit, Schacht created an array of special 
financing institutions, including the infamous "Mefo- 
Institut," with the equivalent of unlimited check-cash- 
ing privileges at his Reichsbank. The Carter administra- 
tion has done essentially the same thing through the 
Energy Security Corporation, the Synthetic Fuels Cor- 
poration, and other Schachtian "off-budget" institu- 

Friedman's defense of Schacht 

Since the demise of the Nazi regime and the postwar 
studies of the Allied Strategic Bombing Survey, Fried- 
man and other monetarists have devoted special atten- 
tion to the Nazi economy, including the internal debates 
among its leaders. The centerpoint of this discussion is 
the 1938 economic crisis during which Field Marshal 
Hermann Goring dumped Schacht from the Reichsbank 
and economics ministry and took over plenipotentiary 
economic powers. The issue was whether the Nazi 
regime could continue to cannibalize its capital and 
workforce to produce weapons, as Hitler and Goring 
insisted it must, without leading to an internal economic 
collapse, as Schacht finally admitted it would. The 
Nazis obviated the internal effects of the crisis produced 
by five years of Schacht's "economic recovery" by 
conquering their neighbors. Gold from the Austrian 
central bank supported the decimated Reichsmark after 
the 1938 Anschluss, and the Nazi war machine tempor- 
arily thrived on Czech, Dutch, Belgian, and French 
plant and equipment, and on the 14 million slave 
laborers murdered at the workcamps. 

What Is Fascist Economics? 25 

The contenders in the current 1980 presidential race 
are committed to a "guns-not-butter" military eco- 
nomic program. Their economic advisers are currently 
reviewing German history of the 1930s to find potential 
exemplars and pitfalls. Whether the United States can 
throw its creaking plant and equipment and de-skilled 
industrial labor force into a military build-up is now a 
central topic of discussion at the Georgetown University 
Center for Strategic and International Studies, the 
Hoover Institution, and the various economics faculties 
now advising Republican Ronald Reagan. The old 
Schacht-Goring debate is playing itself out in what is 
known, through the press, as the "Team A-Team B" 
debate, following the labels of the competing intelli- 
gence evaluations groups that George Bush created 
during his tenure as director of the Central Intelligence 
Agency. "Team A" seeks to upgrade U.S. military 
capabilities, but without destroying the civil economy 
totally. "Team B," which includes Walter Rostow, 
James Schlesinger, and Harvard professor Richard 
Pipes, intends to gut social services and much of the 
civilian productive economy, while going over to a full- 
scale "war economy," in preparation for early war 
between the Soviet Union and the United States. 

To a sane, moral person, the differences between 
Schacht and Goring are the equivalent of a factional 
debate between the eighth and ninth circles of Dante's 
Hell. Goring is arguably more satanic than Schacht, but 
it is Schacht's policies that made Goring's war machine 

Two standard works have come from the ranks of 
Field Marshal Goring's American admirers. One is 
Germany's Economic Preparations for War, by Rand 

26 The Ugly Truth About Milton Friedman 

Corporation analyst Burton H. Klein, published in 1958 
by the Rand Corporation. 1 The second is Studies in the 
Quantity Theory of Money, written two years earlier by 
Milton Friedman and colleagues. 2 The two works are 
complementary. Klein, drawing on similar conclusions 
reached earlier by the Strategic Bombing Survey, ar- 
gued that Germany devoted insufficient resources to 
her war mobilization because of Schacht's unfounded 
concern over inflation. 3 Friedman and his graduate 
student, John J. Klein, attempt to demonstrate that 
Schacht's fears of an internal inflationary explosion 
were unfounded, because "the German economic con- 
trols system was successful not only in restricting indi- 
vidual spending but also in inducing individuals to hold 
their accumulating assets in the form of cash." 4 

The John J. Klein paper, entitled "German Money 
and Prices, 1932-1944," was written during the early 
1950s as a doctoral dissertation under Friedman's direc- 
tion at the University of Chicago. The 1956 volume also 
contains studies of hyperinflation in postwar Europe 
and in the American Confederacy, along with other 
studies of war-related economic breakdown. 

Burton Klein was rather more overtly hostile to 
Hjalmar Schacht than were Friedman and his students, 

"There is no doubt that without this concern for 
inflation, and without such an effective exponent of 
financial conservatism as Schacht, Germany would have 
had a larger rearmament. . . . Procuring additional 
funds by borrowing, it was thought, would destroy 
confidence in the economy and lead to an inflation. The 
fear of inflation weighed heavily in the policy decisions 
of the whole decade. The German leaders simply did 

W hat Is Fascist Economics ? 27 

not at this time understand the elementary economic 
lesson that a nation can finance anything which can be 
produced." 5 

The argument is certifiably lunatic, as we shall prove 
below: If a nation expends its entire investment re- 
sources on nonproductive expenditures, deducting the 
cost of those expenditures from the maintenance fund 
for the labor force and industrial plant, the conse- 
quences will be first hyperinflation and then breakdown. 

But Milton Friedman's analysis, from the vantage 
point of the "quantity theory of money," goes even 
further off the deep end. Unlike Burton Klein, he 
ignores the physical problems of wringing war materiel 
out of a depleted economy, and adopts a single criterion 
for the success or failure of the Nazi economy: whether 
it succeeded in maintaining price stability. What is 
remarkable, the paper concludes, is that the Nazis 
managed to hold the increase of wholesale prices be- 
tween 1932 and 1944 to a mere 22 percent, or less than 
2 percent per year, despite the fact that the money 
supply rose over the same period by 437 percent. 

In Studies on the Quantity Theory of Money, 
Friedman states point-blank that Nazism worked: 

"Germany did not choose to pay for its increased 
expenditures by taxation. Nor did it urge individuals to 
invest in government securities. It did, however, borrow 
heavily from the German banking system. To avoid a 
price boom, and simultaneously to have ready access to 
the credit market, the German government imposed 
economic controls. First wage, price, and credit controls 
and then rationing. Eventually Germany became a 
directed economy. 

"The objective of such controls is the restriction of 

28 The Ugly Truth About Milton Friedman 

spending on the part of individuals, so that individual 
spending will increase less rapidly than the quantity of 
money. Such a policy, if rigorously enforced, should 
restrain a rise in the price level. As indicated earlier, this 
policy appears to have been successful in Nazi Germany. " 6 

Friedman's explanation for this "success" is horrify- 
ing. In his "quantity theory,' 1 the effect of Nazi territo- 
rial annexations is to reduce the problem of excess 
money creation, by spreading the same amount of 
money over a larger population! "The Reichsmark was 
made legal tender in Austria in April, 1938; in Sudeten- 
land in October, 1938; in Memel territory in March, 
1939; in the Free City of Danzig in September, 1939; in 
East Upper Silesia in September, 1939; in the Annexed 
Eastern Provinces in November, 1939; in Eupen, Mal- 
medy, and Moresnet in June, 1940; in Luxembourg in 
February, 1941; in Alsace and Lorraine in March, 1941; 
in Carinthia, Carniola, and Lower Styria in June, 1941; 
and in Bialystock in January, 1942. The above areas 
were directly incorporated into the Reich. The Reichs- 
mark was also made legal tender in the Protectorate of 
Bohemia-Moravia concurrently with the Czech ko- 
runa." 7 Carefully noting these events, Friedman con- 
cludes, "For the purposes of this study it has been 
assumed that the amount of money issued for the newly 
annexed areas was the same percentage of total hand- 
to-hand currency as the population of their areas was of 
the new total population; this assumption is then used 
to estimate the stock of money in the territory of 1937 
Germany." 8 

In their perverted way, John Klein and Milton Fried- 
man are making a correct point: The annexations did 
buttress the value of the Reichsmark, which, in 1938, 

What Is Fascist Economics? 29 

stood on the verge of inflationary collapse. However, it 
was not the fact that the Reichsmark went out of "old 
Germany" into new populations, but the fact that new 
populations were brought into Germany in cattle cars, 
that prevented the Nazi economic system from breaking 

In the "Blitzkrieg" economy, where existing (and 
antiquated) industrial plant spews out "production in- 
width" of existing technological models, the only eco- 
nomic recourse is the cannibalization of the workforce. 
That is the content of the downward revision of the 
German money supply statistics to take into account 
annexed populations, which Friedman et al. factor into 
the Nazis' "success." 

In an October 15, 1941 remark to his Berchtesgarten 
cronies, Hitler put Friedman's arguments in a slightly 
more honest fashion: "Even to Schacht," Hitler said, 
"I had to begin by explaining this elementary truth: that 
the essential cause of the stability of our currency was 
to be sought for in our concentration camps." 9 

Having proven that Nazi policies worked by virtue of 
the stability of the wholesale price index, Friedman and 
his coauthors prefer Goring to Schacht, and prefer 
Albert Speer, who replaced Goring's stooges at the 
economics ministry in 1942, to Goring. They quote 
favorably the evaluation of the Strategic Bombing 
Survey that the Goring economics ministry "expressed 
the general attitude that sacrifices of the civilian popu- 
lation should be kept at a minimum. It tried to equili- 
briate the divergent claims of the industrialists, the 
military, the gauleiters. . . . High cost firms were pro- 
tected, production of superfluous civilian goods contin- 

30 The Ugly Truth About Milton Friedman 

ued, and scarce materials allocated to nonessential 
programs." 10 Therefore, Friedman writes: 

"German authorities realized after the Battle of 
Stalingrad in December 1942, that current economic 
policies were not resulting in the production of arma- 
ments sufficient to insure success in the new phase of 
the war. For this reason a New Ministry of War 
Production was created. Albert Speer as its head had 
almost unlimited control over the industrial resources 
of Germany. His assistants for the most part were 
young managers of efficient business enterprises. At this 
late date industrial capacity could not be expanded. The 
only alternatives were either to restrict civilian con- 
sumption or to improve the use of existing industrial 
capacity. He took the latter course and achieved signif- 
icant increases in armaments production." 11 

Precisely how Speer accomplished this, Friedman 
does not report: The 250 percent increase in arms 
production Speer accomplished between 1942 and 1944 
was the result of the most systematic collection and 
mass murder of slave laborers in human history. 

Speer rejected the crude mass extermination program 
Goring had proposed under the code-name "Green 
File," in favor of more efficient methods of working 
slave labor to death, Goring' s secret orders had stated: 
"Many tens of millions of people in the industrial areas 
[of Russia] will become redundant and will either die or 
have to emigrate to Siberia. Any attempts to save the 
population from starving to death by bringing in sur- 
plus food from the black soil region can be made only 
at the expense of feeding Europe. They undermine 
Germany's ability to hold out in the war. . . . There 
must be absolute clarity on this point. From this fact 
there follows forcibly the extinction of industry as well 

What Is Fascist Economics? 31 

as of a large percentage of the human beings." 12 

Before Stalingrad, the Nazis had permitted the death 
by starvation and related causes of 3,000,000 of the 
3,800,000 Russian prisoners of war taken. Despite post- 
1942 efforts to rationalize the mass murders to achieve 
maximum benefit for the war economy, the Speer 
ministry had to contend with a perpetual labor shortage 
until 1944, when the machine collapsed, as Konstandi- 
nos Kalimtgis has documented. In a 1975 study of the 
Nazi economy, Kalimtgis concluded that "historians 
who clamor about the Nazis' inefficiency in exploiting 
their conquered assets are perhaps even more psychotic 
than the Nazis who carried out the crime." 13 

Speer' s own evaluation of his efforts treats the Nazi 
war machine as a failure. In his memoirs, Speer re- 
ported, "Even at the height of military successes in 1941 
the level of arms production of the First World War 
was not reached. During the first year of the war in 
Russia production figures were a fourth of what they 
had been in the autumn of 1918. Three years later, in 
the spring of 1944, when we were nearing our produc- 
tion maximum, ammunition production still lagged 
behind that of the First World War — considering the 
total production of Germany at the time with Austria 
and Czechoslovakia." 14 

But Speer had less to do with the failure of Nazi 
policy than did Hjalmar Schacht, whose "recovery" 
program of 1933-1938 dug the ground from under the 
German economy. 

Economists like Milton Friedman and Burton Klein 
who wish to defend the feasibility of Nazi economic 
policies reach the same conclusions as the Strategic 
Bombing Survey (which was staffed by liberal econo- 

32 The Ugly Truth About Milton Friedman 

mists among whom were John Kenneth Galbraith, 
Wassily Leontief, and Cambridge University's Nicholas 
Kaldor). The conclusion: The Nazis tolerated too high 
a level of civilian production, The report of the Strategic 
Bombing Survey, which was the source book for Burton 
Klein, Milton Friedman, and the "Team-B" propo- 
nents, concluded: "Germany entered the war with a 
'guns and butter philosophy.' " ,5 This is a lie, as any 
honest examination of the statistics will confirm, and an 
extremely revealing lie. 

No prominent American will publicly endorse fas- 
cism. That is an unpopular position, although nearly all 
of the "Team B" gang privately endorse Nazi methods 
as the best means of achieving the kind of military 
build-up they want. American fascists do not argue that 
fascism is good, but only that fascism works. To main- 
tain this conclusion in the face of the evidence, they 
must argue that the enormous inefficiencies in the Nazi 
economy were simply a matter of misadministration 
and policy errors, and, implicitly, that they could do it 
better. This could turn out to be the last delusion 
American policy-makers ever have. 

The German war mobilization misfired because of 
endemic shortages of skilled labor. It did not occur to 
Schacht, nor to his modern disciples, that labor requires 
investment no less than industrial plant, and that failure 
to meet the investment requirements of labor power 
leads to consequences not much different from deterio- 
ration of the capital stock. Real wages in Germany in 
1933 were roughly half of their 1929 level. The Labor 
Front fixed wages at that low level, but in fact reduced 
them through unemployment insurance; Wintershilfe 
and other payroll deductions, including "retirement 

JVhat Is Fascist Economics? 33 

insurance'*; Labor Front dues; and the notorious peo- 
ple's car (Volkswagen) swindle. Wage reductions of this 
sort and the deterioration of consumer goods {ersatz 
goods) kept living standards down throughout the 
1930s at levels substantially below those of 1929, and 
1929 levels were significantly below those of 1913. An 
entire generation of Germans — those aged twenty-one 
or younger at the time Hitler seized power — had grown 
up in relative poverty, marked by long periods of mass 
unemployment and near-starvation. Germany entered 
the 1930s missing an entire generation of skilled labor. 

The defenders of Schacht and Goring must thus go 
to ridiculous extremes to explain away the Nazi eco- 
nomic crisis as excess consumption. For example, 
Schacht's (sympathetic) biographer Edward Norman 
Peterson wrote in 1954: "Despite the cries of Hitler that 
he was waging a Total War,' Germany was making less 
of an economic effort than any of her opponents. There 
was no 'total mobilization'; civilian goods were re- 
stricted only to a moderate extent. Any serious restric- 
tion began only in 1942, when the war was three years 
old. Total employment increased by 8 million or 30 
percent between 1930-1939. This was not fully mobi- 
lized, not even unduly concentrated on war production. 
Civilian consumption in 1939 at the outbreak of the war 
was above the 1929 level and it had fallen only slightly 
by 1941. " I6 Peterson cites total civilian consumption 
figures in the same breath he reports that 8 million 
people entered the labor force! The increase in overall 
consumption was entirely due to expansion of the labor 
force; per capita income remained at roughly half the 
1929 level. 

The only mystery is how Friedman, Klein, and other 

34 The Ugly Truth About Milton Friedman 

Schachtians could fail to make the connection between 
the already abysmal consumption levels of the Third 
Reich and the tendency of Nazi industry to disintegrate. 
Between 1933 and 1939 enrollment in technical schools, 
the equivalent of our engineering schools, fell from 
20,474 to 9,554. The quality of graduates declined even 
further. At the skilled operative level, apprenticeship 
programs became a national scandal. In one test of 400 
apprentices in Hamburg, three quarters of those tested 
failed to capitalize proper names, and an equal number 
could not spell the name of Goethe. The Nazi Labor 
Front attempted, without success, to prevent industri- 
alists from raiding each other's skilled labor with under- 
the-table wage bonuses. Like today, demand for skilled 
labor was highest in the military industry sector, and 
skilled labor shortages therefore had their greatest 
impact on military production. The Third Reich inher- 
ited an exhausted, impoverished population from the 
dead Kaiserreich and the Weimar Republic, and suf- 
fered the consequences. 

It must be added that Nazi educational methods, 
which placed primary emphasis on physical education 
and second on "racial science," did not contribute to 
the cognitive powers of the population. But at least 
German youth did not have to contend with rock music 
and marijuana, the most efficient methods of killing a 
population's cognitive powers. 

Before judging the statistics concerning German tech- 
nical school graduates, the American reader should 
consider that the number of doctorates in physics 
awarded in the United States in the past ten years has 
also fallen by half. Despite a 7 to 8 percent (actually 
closer to 10 percent) unemployment rate, America cur- 

What Is Fascist Economics? 35 

rently has a serious skilled labor shortage. For every 
four positions opening for machinists today, only one 
qualified machinist is graduating from apprenticeship 
programs, and the same pattern applies in other job 

No world war, no punitive reparations payments did 
this to us. The long-term application of Friedmanite 
economics has done to the United States approximately 
what the First World War and the Treaty of Versailles 
did to Germany. 

The Schachtian dictatorship today 

It would be dangerous to imagine that Paul Volcker's 
command over the United States' credit system is 
anything less than a dictatorship, or that his policy 
objectives are any different from those of Hjalmar 

Two pieces of legislation — the 1969 Credit Control 
Act and the Omnibus Banking Bill of 1980 — establish 
the Federal Reserve and its chairman, Paul Volcker, as 
an economic dictatorship capable of rule by decree. On 
March 16, 1980, President Carter invoked the Credit 
Control Act of 1969, which was drafted at the time by 
the predecessor organization of the Federal Emergency 
Management. Agency. This legislation gave the Federal 
Reserve the power to control or prohibit every transac- 
tion in the banking system down to the level of the 
corner savings and loan association, to fix interest rates, 
to stop foreign money transfers, to allocate credit to the 
borrowers it chooses, or any other action the Fed 
requires. 17 Strictly speaking, the Federal Reserve and 

36 The Ugly Truth About Milton Friedman 

Paul Volcker have more power on paper than any 
central bank and its governor at any previous time in 
modern history, including the tenure of Hjalmar 
Schacht at the Reichsbank. 

All the possible powers under the Credit Control Act 
have not yet been invoked. But the effect of the formal 
use of this legislation for the first time since August 15, 
1971, when the United States removed gold backing 
from the dollar, combines with the Omnibus Banking 
Bill sponsored by Rep. Henry Reuss (D-Wisc.) and 
signed into law by President Carter on March 31, 1980, 
to give the Federal Reserve awesome power. 

The content of the Reuss legislation is, first, to 
eliminate the differences between commercial banks and 
savings institutions, by phasing out the "Regulation Q" 
differential between the interest rates they may pay on 
deposits; to undermine the 1954 McFadden Act ban 
against interstate banking, which protects regional 
banking institutions from predatory takeovers by large 
money-center banks; and to give the Federal Reserve 
additional powers to raise compulsory reserves from 
banks that have left the Federal Reserve System. Under 
the sweeping 1969 legislation, the Federal Reserve can 
do whatever it wants. Even more, the Federal Emer- 
gency Management Agency, under the limitless powers 
of the National Security Act of 1 947 (the legislation that 
created the Central Intelligence Agency and other such 
entities), can take over and run banks, merge banks, 
collapse banks, or create banks the moment the Presi- 
dent declares a "national banking emergency." 

Except for the possible intervention of FEMA, the 
remaining supports of the Volcker credit dictatorship 
have been discussed extensively in the public press. To 

What Is Fascist Economics? 37 

be more precise, they have been widely misrepresented 
as measures to control inflation by halting the rate of 
growth of the money supply, in accordance with Milton 
Friedman's doctrine that the rate of expansion of the 
money supply determines prices. On that level, Volcker 
has indeed brought the rate of increase of the money 
supply down from about 10 percent prior to his October 
7 announcement of tight money, to between 3 and 4 
percent during the first few months of 1980, the range 
recommended by Friedman for the past thirty years. 
However, the rate of inflation doubled by February 
1980, from about 11 percent to about 20 percent, a 
pattern identical to that of every other period when 
Friedman's recommendations were adopted in an indus- 
trial country. 

There is no direct connection between the rate of 
inflation and money supply growth. Inflation is deter- 
mined by the way the expansion of credit affects the 
economy's productivity, or by the extent to which new 
credit is applied to productive rather than nonproduc- 
tive uses. Credit expansion to build corporate headquar- 
ters, gambling casinos, or weaponry is inflationary, 
while credit to finance investments in new productive 
facilities at state-of-the-art technology is counterinfla- 
tionary. The final chapter of this book will treat this 
question in depth. Suffice it for now to emphasize that 
the cause of the gross divergence between the rate of 
money supply growth (itself a poor measure of the rate 
of credit expansion) and the inflation rate has nothing 
to do with the time delays that Friedman and his 
followers predict between the imposition of tight money 
policies and the reduction of inflation rates. 

Volcker's measures absolutely do not represent a 

38 The Ugly Truth About Milton Friedman 

tight credit regime as such, but a two-tier credit regime 
that favors nonproductive investments above all others. 
In combination with an unpleasant (and little-discussed) 
feature of Carter's budget program known as "off- 
budget" financing, the Federal Reserve has effected a 
shift of about 15 percent in the composition of total 
industrial output from productive to nonproductive 
categories. 18 In precise parallel to 1933-1938 Germany, 
the reduction in output in productive categories has 
occurred mostly in consumer goods industries, and the 
increase in nonproductive categories has occurred in 
military-related industries or investment in "energy self- 
sufficiency" (the same as Schacht's "autarky"). 

The only difference worth mentioning is that while 
Schacht took office some years after the onset of the 
depression, with the collapse of the consumer goods 
industries ready-made, Volcker needed to engineer a 
collapse of the consumer sector in order to carry out the 
same shift in composition of the economy's total output. 

In more detail: the most important categories of 
consumer durable goods are residential construction 
and autos. In September 1969, their combined value of 
output was $150 billion at an annual rate. That figure 
had dropped by half as of March 1980. From a Septem- 
ber 1979 level of 2 million housing starts per year — less 
than the absolute minimum replacement level for the 
existing housing stock of 2.5 million units per year- 
housing starts have fallen by two thirds, the sharpest 
drop since World War II. Auto production has fallen 
by slightly under 20 percent at this writing, although 
the daily reportage of auto layoffs is so continuous that 
the decline will undoubtedly go much further. These 
industries rely on an orderly flow of consumer credit in 

What Is Fascist Economics? 39 

the form of mortgages and installment loans. Volcker 
pulled the bottom out from under them. 

First, the record-breaking interest rate levels achieved 
during March 1980, including a 20 percent prime rate 
that exceeds any rates in the recorded history of the 
republic, sucked funds out of the financial institutions 
that provide consumer credit. Whether or not the 
savings banks, which are losing deposits at the rate of 
several billion dollars a month, will survive 1980 without 
mass bankruptcies is now a matter of Paul Volcker's 
largesse. Whatever becomes of these institutions, which 
will lose an estimated $4 billion on their profit-loss 
accounts in 1980, they have left the lending markets. 
Mortgage credit is available only at interest rates in 
excess of 14 percent, and is usually not available at all. 
The finance companies, including those attached to 
Ford Motor Company and Chrysler Corporation, 
which provide funds to auto dealers for installment 
loans, are in the same position. The bankruptcy rate 
among auto dealers is higher than that among profes- 
sional gamblers. Volcker's direct order to the banks to 
reduce the availability of consumer credit through the 
commercial banking system has succeeded in cutting 
the 1979 rate of bank lending to consumers in half. 

Americans lost 8 percent of their purchasing power 
between March 1979 and March 1980, the largest drop 
in real income levels since the Great Depression. This 
was only the first of Volcker's shocks. Since consumer 
purchasing power is proportional to the output of 
consumer goods, the drop in 1980 will be at least as 
large, and possibly twice as large. We are moving into 
the range of income-reduction that German consumers 
suffered between 1929 and 1933. 

40 The Ugly Truth About Milton Friedman 

As noted, the prospects for our youth, even discount- 
ing the ghettoized hell to which most minority youth 
are assigned, do not bear favorable comparison with 
those of German youth in the early 1930s. 

It would be a devastating mistake to treat these events 
as mere symptoms of a classical depression. In that 
sense comparisons to the American Great Depression 
of fifty years ago are misleading. Statistical comparisons 
prove that there is a fundamental difference between the 
1980 situation and previous industrial declines. For 
example, in the biggest postwar decline, between Sep- 
tember 1974 and March 1975, the rate of decline of the 
consumer goods industries was slower than during the 
comparable period of 1979-1980. Auto production fell 
by approximately the same amount, with roughly the 
same number of auto layoffs, but housing starts fell by 
only 20 percent, a mere third of their fall during the 
first six months of 1980. Yet the industrial production 
index, a handy rough measure of real economic activity, 
declined by 15 percent. That is, when the big consumer 
goods sectors dropped off, industries stopped making 
investments, and orders for capital goods plunged; the 
suppliers of the consumer industries in primary metals, 
rubber, and construction materials dropped off; and the 
entire economy shrank in roughly the same proportions. 
During the seven months after Volcker's recession 
trigger in October 1979, however, despite the record 
decline of the consumer goods industries, total indus- 
trial production did not fall. Capital goods output only 
fell after March 16, 1980, when Volcker imposed credit 
controls affecting the total volume of funds banks were 
permitted to lend. 

What Is Fascist Economics? 41 

What is important is that those seven months saw a 
shift in the composition of the American economy. To 
the extent that consumer goods had fallen, other goods 
had been produced in greater quantity. Every sector to 
benefit was related to either war preparations or the 
equivalent — Carter's "energy independence" program. 

The auto industry profile shows why production of 
capital goods had risen, in most cases, despite the 
elimination of housing and auto, two of the economy's 
biggest sectors. During the next five years, the three 
major automakers — Ford, General Motors, and Chrys- 
ler — will spend $60 billion to retool their assembly lines 
for smaller, "fuel-efficient*' cars. Even in inflated 1980 
dollars, this is the most extensive investment program 
the auto industry has adopted since the heyday of the 
1920s. At its conclusion they will not produce more 
cars, or better cars, but only cars that consume less 

As a senior Ford Motor Company official com- 
plained in a conversation with the authors, government 
regulations prevent Ford Motor from going into the 
nuclear power business; if Ford invested the $20 billion 
required to produce fuel-saving cars in nuclear power 
plants, it would save the country a great deal more oil, 
and make a great deal more money. Instead, auto- 
makers must retool under orders from the Environmen- 
tal Protection Agency, if they wish to do business five 
years from now. They may not be able to sustain this 
rate of investment, for the simple reason that Chrysler 
(and possibly Ford) are likely to go bankrupt. Chrysler 
has already failed to obtain the commercial bank sup- 
port demanded by Treasury Secretary G. William Miller 
as a condition for the federal loan guarantees it needs to 

42 The Ugly Truth About Milton Friedman 

stay in business. Ford lost $1 billion in domestic opera- 
tions, barely breaking even through foreign profits, 
during 1979. This year it will lose a great deal more and 
make less money abroad. Chrysler's business may be 
restricted to its one big government contract — tank 
production — and Ford may soon be in the same situa- 

Aerospace is also booming, with the largest order- 
book in history. Most of this is not Pentagon orders, 
but, under national security legislation, all civilian 
aircraft must now be built readily convertible for mili- 
tary usage. Production is so high that the leading 
aircraft makers report endemic shortages of skilled 
labor, machine tools, ball bearings, electronic compo- 
nents, specialty metals, and other goods from the upper 
end of the technology spectrum. The demand for elec- 
tronic components is so intense that their manufactur- 
ers — on orders from the Department of Defense — have 
already begun to suspend production of consumer items 
such as electronic games in order to meet military- 
related aerospace orders. Equally intense is the demand 
for machine tools, whose manufacturers are swamped 
with a three-year backlog of orders. In the past, the 
auto and aerospace industries combined bought about 
12 percent of the nation's output of machine tools. Now 
they are absorbing more than 25 percent of machine 
tool production, to service the programs ordered by the 
Carter administration. 

Overall, these and similar military and "energy inde- 
pendence" programs have produced a swing of about 
15 percent from consumption into investment, setting 
the trend demanded five years ago in Challenge maga- 
zine under the rubric, "The Coming Corporativism: 

What Is Fascist Economics? 43 

Fascism With a Democratic Face." The economy is 
already running into extreme shortages in every field 
requiring advanced labor skills and high-technology 
products. In the strictest economic terms, America is 
becoming a fascist economy. 

At the administrative level, Paul Volcker already has 
more authority under the Credit Control Act of 1969 
than Schacht ever enjoyed. His power is supplemented 
by a group of specialized financial institutions that 
operate off the federal budget, allocating credit to 
various forms of war preparedness. Off-budget financ- 
ing is not in principle fascist; it began under the New 
Deal as a Rooseveltian method of channeling credit to 
depressed sectors, including agriculture and housing. 
During the 1970s, the off-budget agencies did relatively 
little mischief, the worst of which was support for the 
secondary-market real estate bubble through the gov- 
ernment-sponsored housing program. Under off-budget 
financing, the Government National Mortgage Associ- 
ation, the Farm Credit System, and various other 
entities borrowed from the capital markets under federal 
guarantee, making their operations indistinguishable 
from the deficit financing of the Treasury itself. 

By the fiscal year 1981 budget, the volume of such 
financing approached $80 billion, making somewhat 
ironic the Carter administration's claim to having intro- 
duced a balanced budget. This time the housing agen- 
cies found their borrowing quotas cut by $10 billion 
across the board. In their place, the administration 
programmed an additional $10 billion in borrowings by 
the Energy Security Corporation, newly created to 
finance "energy independence" efforts, including syn- 

44 The Ugly Truth About Milton Friedman 

thetic fuels plants, solar power, and the oil reserve 
pumped into the Louisiana salt domes. Additional 
borrowing authority appeared for aerospace, railroads, 
and other military-related industries. 

These numbers are relatively small, but promise to 
balloon enormously. As cited earlier, Carter's proposed 
$80 billion in synthetic fuels plants is still under congres- 
sional debate. But the expected designation of "energy 
production" as a military requirement under legislation 
sponsored by Rep. Moorehead of Pennsylvania would 
permit the Federal Emergency Management Agency, 
the moment Carter or his successor declares emergency 
conditions, to ensure that no resources are allocated 
until the synfuels program has had its fill. In this event 
the entire $80 billion price tag would be added to the 
off-budget agencies' borrowing. 

Schacht invented this kind of "off-budget" financing 
in 1934, through the creation of two dummy corpora- 
tions, the Public Employment Co. and the Metallurgical 
Research Co., or "Mefo-Institut." Between 1934 and 
1937, the Mefo-Institute guaranteed 12 billion Reichs- 
marks of bills in payment of war production. Techni- 
cally, Schacht was permitted to buy bills of exchange 
due for collection in return for Reichsbank cash — a 
normal central banking function — only on a short-term 
basis. Mefo-bills' payment schedules were extended to 
five years. With a government guarantee, the Mefo-bill 
was the equivalent of cash, except that it earned interest 
like any commercial paper. 

Thus Mefo-bills both circulated among manufactur- 
ers and contractors as a means of payment for war 
production, or were held as an interest-bearing asset by 
industrialists and banks. As more of this paper cascaded 

What Is Fascist Economics? 45 

onto the German money market, commercial and sav- 
ings banks were ordered to invest 30 percent of their 
deposits into Mefo-bills; securities frozen during the 
1929-1931 collapse were "unfrozen" on condition of 
reinvestment into Mefo-bills; and municipalities, insur- 
ance companies, and others were compelled to place 
almost all their cash balances into Schacht's armaments 

Altogether, Schacht managed to finance half of all 
military production expenditures in this fashion between 
1934 and 1937. The scale of the operation is staggering. 
Mefo-bills, which were a cash equivalent, grew by 12 
billion marks, more than the 9.3 billion mark growth in 
what Friedman calls the money stock — currency plus 
bank deposits! 19 Factored into the money supply fig- 
ures, the rate of money supply growth during Schacht's 
tenure at the Reichsbank was an inflationary 17 percent 
per annum. 

Among other drawbacks, Friedman's "quantity the- 
ory" analysis of Nazi Germany is incompetent. How- 
ever, as Schacht demonstrated, money supply bears no 
necessary relation to anything. Schacht compensated for 
the explosive growth of Mefo-bill financing by shrinking 
general availability of credit, throwing all available credit 
into the weapons drive. 

In his valedictory speech as Reichsbank president 
November 19, 1938, Schacht described the measures he 
took to "control the course of the expansion of 
credit." 20 They included limitations of security issues by 
private firms to clear the capital markets for the Mefo- 
bills; draining funds from the money markets through 
the issue of special Gold Discount Bank bills, what we 
would now call "open market operations"; and direct 

46 The Ugly Truth About Milton Friedman 

controls over bank lending. He did not go as far as 
Milton Friedman, who wants the total elimination of 
the credit-creating powers of commercial banks, but he 
did succeed in draining all net available funds into 
rearmament. 21 

However, Schacht observed that the prospects for 
success of this operation ended when no additional real 
economic resources were available for diversion into 
arms manufacture: "The spring of 1938 signified a new 
period in our financial policies because then the German 
economy had reached the condition of full employment. 
As soon as a national economy had taken up the last 
available working resources and all available materials, 
every further credit expansion would not only be sense- 
less but destructive." 22 Hitler's response we cited earlier. 

The only real difference between Schacht's Mefo-bills 
and Carter's off-budget securities is that Schacht, fearful 
of a panic, kept the size of Mefo-bill issuance secret. 
Details of the Carter administration's financial opera- 
tions are available in Special Analyses of the Budget of 
the United States, published by the Office of Manage- 
ment and Budget. 

Volcker's aim is to repeat Schacht's achievement, as 
described by Milton Friedman in Studies on the Quantity 
Theory of Money: to maintain gigantic nonproductive 
expenditures while preventing an inflationary collapse 
of the monetary system. Inherently, war production, 
especially blitzkrieg production in-width at a stagnant 
level of technology, is violently inflationary. Production 
of energy at costs several times in excess the cost of 
nuclear-generated electricity is also inflationary, for two 
reasons. First, the energy-price requirements to finance 
high-cost energy raise the base rate of inflation through 

What Is Fascist Economics? 47 

pass-ons of energy prices. More fundamentally, the 
high-cost energy programs generate inflation by sabo- 
taging capital formation throughout the economy. 

Synthetic fuels, secondary oil recovery methods, oil- 
shale production methods, coal mining of the conven- 
tional sort, coal-slurry pipelines, solar power, and other 
high-cost methods have an incredible appetite for capi- 
tal goods. These capital goods must be taken away from 
other sectors. Since the American economy is already 
running a net deficit in investible goods— that is, it is 
burning up more of its plant and equipment than it 
replaces each year — the effects of massive investment in 
high-cost energy methods would be catastrophic. The 
result is that the collapse of industrial efficiency 
throughout the economy due to Schachtian investments 
lets loose a hyperinflationary tendency. 

Despite the tendency toward hyperinflation under fas- 
cism, it is possible to suppress inflation, at least for 
some period of time, as Milton Friedman said in his 
now-classic study of Nazi economics. In a 1976 discus- 
sion with LaRouche, the French economist Jacques 
Rueff proposed an alternative definition of fascist eco- 
nomics as "inflation turned inward against the economy," 
leading to the same conclusion as LaRouche's different 
approach. Instead of absorbing the consequences of 
massive nonproductive spending through increasing 
price levels, the Nazi economy absorbed these conse- 
quences by cannibalizing the economy's own flesh and 
bone, turning inflation inward. Rueff s definition is 
precise and correct, and stands in striking contrast to 
Milton Friedman, who leaves the consequences for the 
real economy out of his analysis altogether. 

48 The Ugly Truth About Milton Friedman 

In his 1964 book The Age of Inflation, Rueff wrote 
that Hitler ironic? lly found the magical cure for infla- 
tion that governments sought: 

"In reality, only one man succeeded in coming to 
terms with inflation — Hitler. He understood that infla- 
tion destroys the ties that bind man's desires to reality, 
and, in so doing, transforms their freedom into a 
terrible menace to the social order. To save the social 
order, he sacrificed freedom. By subjecting individual 
conduct to strict control, he restrained people from 
utilizing that part of their purchasing power which 
exceeded the value of the purchaseable wealth. In this 
way he was able to distribute generously the means of 
buying goods which did not exist. He turned this lie 
into a system of government." 23 

Hjalmar Schacht was a monumental liar — witness his 
performance in the dock at the 1948 Nuremberg War 
Crimes Tribunal. But Milton Friedman makes him look 
like a man of integrity. The two factions among the 
Nazi economic planners (and their present-day disci- 
ples) can be characterized as those who merely want to 
lie to the public, in the deeper sense of Rueff s analysis, 
and those who want to lie also to themselves. 

In his memoirs, Schacht wrote: "The unlimited in- 
crease in Government expenditure brings the national 
finances to the verge of bankruptcy despite an immense 
taxation screw, and as a result is ruining the Central 
Bank and the currency. There exists no recipe, no 
system of financial or money technique ... to check the 
devastating effects on currency of a policy of unre- 
stricted spending. No central bank is capable of main- 
taining the currency against an inflationary spending 
policy on the part of the State." 24 

What Is Fascist Economics? 49 

To be more precise, Schacht should have said, "ca- 
pable of so doing for any length of time." He managed 
to do it by "turning inflation inward against the econ- 
omy" for some four years. Rueff s analysis establishes 
the point of failure of Nazi economic policy as the point 
of exhaustion of real economic resources. No sane 
person could view the matter any other way. Even 
Hjalmar Schacht understood this, only making the 
blunder of trying to explain it to Hitler and Goring. 

In a certain way, Milton Friedman takes real eco- 
nomic resources into indirect account, by factoring in 
the slave populations of Nazi-conquered Europe to 
"adjust the money supply figures." But he insists that 
real economic resources had nothing whatsoever to do 
with the problems of the Nazi economy. He argues that 
the Nazis permitted civilian economic activity "to op- 
erate in a leisurely, semi-peace fashion," and that they 
failed to "restrict civilian consumption" until efficiency 
expert Albert Speer took over. 25 

One critical instance of lying by omission must be cited 
in Milton Friedman's account of Nazi economics. 
Jacques Rueff pointed it out, with some bitterness: 
"Contrary to general belief, Dr. Schacht did not invent 
Hitler's monetary policy." 26 Germany's British and 
American creditors, Rueff reported, "advised Germany 
to suspend its foreign commitments and authorized it to 
put into effect, with the blessing of its creditors, the 
system that was to enable Dr. Schacht and Hitler to 
finance war preparations and finally unleash war 
itself." 27 

Rueff s insight is of the greatest importance. Negoti- 
ations for what was called the Standstill Agreement of 

50 The Ugly Truth About Milton Friedman 

1931 — which prevailed throughout the 1930s and al- 
lowed Germany a moratorium on foreign debts — were 
an amicable exchange between the London, New York, 
and German branches of the Warburg and Schroeder 
banking houses. Paul Warburg, the "father of the 
Federal Reserve System, 1 ' and German resident Max 
Warburg, who remained Schacht's deputy at the 
Reichsbank until 1938, had jointly made the decision in 
1931 to deny Germany further credits and precipitate 
the great 1931 European banking crisis. The Morgan- 
influenced American Secretary of State, Henry Stimson, 
proposed the 1931 moratorium in a way that ensured 
Hitler's ascendancy in Germany. Max Warburg's col- 
laborator Schacht emerged as the political fixer in 
German politics, with sufficient clout to tell industrial- 
ists who gathered to hear Hitler's exhortations, "Und 
nun, meine Herren, an die Kasse" ("And now, gentle- 
men, take your checkbooks out"). Industrialists' levies 
for Hitler were paid into secret accounts at the Schroe- 
der Bank. Germany's British and American creditors 
were the underwriters for the Nazis' rise to power. 

Through the looking-glass with 
Milton Friedman 

If, as an intellectual exercise, we asked the reader to 
construct an "economic theory" that could describe 
Nazi economics as a possibly "successful" system, he 
would probably start this way: The first condition of 
this new economic theory would have to be that the real 
economy never has to be taken into account, and the 
second condition would have to be that the theorizer 

What Is Fascist Economics? 51 

can define "reality" to be whatever he wants it to be 
whenever he wants it to be that way. 

You have now grasped the essence of Milton Fried- 
man's economic theory. 

The preceding documentation of the facts of the 
matter is indispensable background to any useful dis- 
cussion of Milton Friedman's theoretical views as such. 
In his published output, Friedman carefully distin- 
guishes between his "popular" books such as Capitalism 
and Freedom or Free to Choose, and his technical works, 
including Studies in the Quantity Theory of Money, 
Essays in Positive Economics, A Monetary History of the 
United States, and Milton Friedman's Monetary Frame- 
work. The technical works are unreadable academic 
jargon that virtually no one reads. However, Friedman 
sets forth a theory capable of predicting the success of 
the Nazi system, and the above description of that 
theory is no exaggeration. 

Friedman's early notoriety as a "theorist" sprang 
from an essay published in 1953 in Essays in Positive 
Economics, entitled, "The Methodology of Positive 
Economics." He insisted there that his approach was 
"positive," which he said meant "objective," while 
everyone else's was by implication "normative," that is, 
shaped to fit preconceived conclusions. "Friedman's 
strong implication was that economists who disagreed 
with him were guilty not only of questionable values or 
political purposes but also of an unscientific method, a 
neglect of 'positive economics,' rankled New York 
Times economics writer Leonard Silk after Friedman 
was awarded the Nobel Prize. 28 Silk continued: "The 
most controversial part of Friedman's concept of posi- 
tive economics was still to come. For it was not merely 

52 The Ugly Truth About Milton Friedman 

that the validity of hypotheses could be tested by the 
accuracy of their predictions; rather, this was the only 
way they could be evaluated. To judge a hypothesis by 
the realism of its assumptions would be illicit. Thus, he 
contended, it is wrong to reject the hypothesis of free- 
market price determination in an industry if it turns out 
on inspection that the industry is not perfectly competi- 
tive; what matters is whether prices are set as if there 
were perfect competition. Friedman went so far as to 
make a positive virtue out of 'unrealistic' assumptions." 

Let us quote what Friedman had to say on the 

"In so far as a theory can be said to have 'assump- 
tions' at all, and in so far as their 'realism' can be 
judged independently of the validity of predictions, the 
relation between the significance of a theory and the 
'realism' of its 'assumptions' is almost the opposite of 
that suggested by the view under criticism. Truly impor- 
tant and significant hypotheses will be found to have 
assumptions that are wildly inaccurate descriptive repre- 
sentations of reality, and, in general, the more significant 
the theory, the more unrealistic the assumptions (in this 
sense). The reason is simple. A hypothesis is important 
if it 'explains' much by little, that is, if it abstracts the 
common and crucial elements from the mass of complex 
and detailed circumstances surrounding the phenomena 
to be explained and permits valid predictions on the 
basis of them alone. To be important, therefore, a 
hypothesis must be descriptively false in its assumptions; 
it takes account of, and accounts for, none of the many 
other attendant circumstances, since its very success 
shows them to be irrelevant for the phenomena to be 
explained." (emphasis added) 29 

What Is Fascist Economics? 53 

If the "predictive value" of theories were the only 
thing by which to judge them, Friedman has a great 
deal of wrong predictions to explain, including that 
Nixon's tight money policy would ease inflation (it did 
not), that Britain's 1979 tight money program would 
ease inflation (inflation quadrupled), that application of 
his free-market principles by the Begin government 
would reduce Israeli inflation (inflation became so bad 
that the government will issue a new currency), that oil 
prices would fall shortly after 1974, and so forth. 
Friedman has the worst predictive record in the eco- 
nomics profession, itself notorious for failed pre- 

But that is not the important point here. Friedman is 
making a statement in the tradition of the Bertrand 
Russell- Ludwig Wittgenstein positivists, restricting the 
pursuit of knowledge to abstract and arbitrary juggling 
of empirical data. But not even one of the most extreme 
Vienna positivists would ever argue that some simple 
extrapolation of a tendency one chances to hit upon in 
a data series proves any hypothesis, merely because 
some other data collected in the future happen to fit 
into the linear extrapolation trend. In any event, Fried- 
man never succeeded once in explaining anything in this 
fashion, as readers who have puzzled through A Mone- 
tary History of the United States well know. It takes a 
while to sink in, but Milton Friedman means precisely 
what he says about the realism of assumptions, namely, 
"the more significant the theory, the more unrealistic 
the assumptions." 

Friedman does exactly what he advises. He treats the 
Nazi economy in terms of monetary flows only, in order 
to reach the conclusion that Schacht and his successors 

54 The Ugly Truth About Milton Friedman 

acted correctly, except to the extent they permitted 
excessive consumption. No special acumen for number- 
juggling is required to accomplish this. All that is 
needed is to adopt any arbitrary criterion after the fact, 
"abstract the common and crucial elements from the 
mass of complex and detailed circumstances surround- 
ing the phenomenon to be explained," and array the 
statistics accordingly. Without attributing undue merit 
to the economics profession, which after all made 
Friedman the president of its association a decade ago, 
it is safe to say that Friedman is exceptional in making 
the most extreme form, of radical nominalism instated 
principle of his methodology. "Words mean what I 
want them to mean," said Humpty-Dumpty to Alice, 
but without the unctuous claim that this represented the 
most objective of all sciences. 

What precisely is it that Friedman claims to have 
achieved as a theoretical economist? In a Mad Hatter's 
"debate with his critics" published by the University of 
Chicago in 1970, Friedman stated his claim to fame to 
be a method of describing economies in monetary terms 
only, without reference to the problem of real economic 
growth. This is what stands behind Friedman's assertion 
that the Nazi economy was "successful" from the 
standpoint of monetary analysis. Waspishly, Friedman 
accused his critics of misunderstanding him by falsely 
assuming that he was talking about real economic 
growth, whereas the "quantity theory of money" has 
nothing to do with anything but money and prices: 

"We have always tried to qualify our statements 
about the importance of changes in M* by referring to 

* Friedman's symbol for money supply. 

What Is Fascist Economics? 55 

their effect on nominal income. But this qualification 
appeared meaningless to economists who implicitly 
identified nominal with real magnitudes. Hence they 
have misunderstood our conclusions. 

"We have accepted the quantity-theory presumption, 
and have thought it supported by the evidence we 
examined, that changes in the quantity of money as 
such in the long run have a negligible effect on real 
income, so that nonmonetary forces are 'all that matter' 
for changes in real income over the decades and money 
'does not matter'. ... I regard the description of our 
position as 'money is all that matters for changes in 
nominal income and for short-run changes in real in- 
come' as an exaggeration but one that gives the right 
flavor of our conclusions." 30 

The context for this extraordinary statement was an 
Alice-in-Wonderland exchange with Keynesian James 
Tobin (who served on John Kennedy's Council of 
Economic Advisors) and various others. Tobin and the 
Keynesians do not come off looking too well either — 
from the standpoint of the intelligent layman who 
expects economists to tell him how the economy works. 
Friedman's idea is that if you dump more money into 
the system, people will spend it and prices will 
go up; 

"The quantity theory of money takes for granted . . . 
that there is a fairly definite real quantity of money that 
people wish to hold under any given circumstances. 
Suppose that the nominal quantity that people hold at 
a particular moment of time happens to correspond at 
current prices to a real quantity larger than the quantity 
that they wish to hold. Individuals will then seek to 
dispose of what they regard as their excess money 

56 The Ugly Truth About Milton Friedman 

balances; they will try to pay out a larger sum for the 
purchase of securities, goods and services, for the 
repayment of debts, and as gifts that they are receiving 
from the corresponding sources . . . which will lead to a 
bidding up of prices and perhaps also to an increase in 
output." 31 

That is, if you hand more money around, people will 
go out and spend it, and prices will rise. Friedman's 
bone of contention with the Keynesians is their argu- 
ment that output would go up instead of prices, that 
"quantity was the variable that adjusted rapidly, while 
price was the variable that adjusted slowly." 32 Keynes 
also added a long and involved argument that under 
some conditions, such as the Great Depression of the 
1930s, people will refuse to spend their excess cash, no 
matter how much is floating around. Keynes said this 
would happen because of "overinvestment" in useful 
production. Investments would not make a profit any 
longer, as people would hold onto their cash or its close 
equivalent — short-term government securities; Keynes 
called this "absolute liquidity preference." His well- 
known remedy was to have the government spend it for 
them, although not on anything useful, because that 
would make matters worse. The government should 
spend money on nonproductive things, such as digging 
holes in the ground, according to the British epigram, 
"Two pyramids, two masses for the dead are better than 
one; but not so two rail lines from London to Birming- 
ham." 33 

In the Friedman-Tobin debate, equations fly back 
and forth like cow pancakes. Friedman insists that 
"prices adjust more rapidly than quantities, indeed, so 

What Is Fascist Economics? 57 

rapidly that the price adjustment can be regarded as 
instantaneous." Tobin replies that the "Phillips Curve" 
sets the "trade-off" between prices and quantity: "A 
large fraction of the profession is preoccupied with 
theoretical and empirical investigations" of whether 
prices or output go up when you dump in more 
money. 34 

Friedman correctly points out that neither he nor the 
Keynesians have what he calls the "missing equation" 
that tells us what the relationship might be between 
prices and real economic activity. That is true; the 
"Phillips Curve" that the Keynesians proudly hailed in 
1970 said that prices went up when unemployment went 
down and prices went down when unemployment went 
up. In these years of combined depressed real economic 
activity and high inflation, the discredited "Phillips 
Curve" has disappeared from the academic journals and 
the financial pages. 

The remedy Friedman proposes to the terrible predic- 
ament of the economics profession, which admittedly 
could not find any relationship between prices and 
output, is breathtakingly simple: ignore the problem 
altogether. That is no exaggeration; he says it. 

Friedman proposes "bypassing the breakdown of 
nominal income between real income and prices and 
using the quantity theory to derive a theory of nominal 
income rather than a theory of either prices or real 
income." 35 This works out nicely, Friedman discovered. 
"One finding that we have observed is that the relation 
between changes in the nominal quantity of money and 
changes in nominal income is almost always closer and 
more dependable than the relation between changes in 

58 The Ugly Truth About Milton Friedman 

real income and the real quantity of money or between 
changes in the quantity of money per unit of output and 
changes in prices." 36 

"Nominal quantity of money" means how many 
dollars are sloshing around, and "nominal income" 
means how much money individuals get, regardless of 
how much this money can buy. Friedman says that 
there is a "close and dependable" link between these 
two things, a conclusion that does not seem particularly 
striking. Note that he says that the relationship between 
money and prices and money and output is not so 
dependable — although he does not say so in his News- 
week columns or in his television programs. 

Where his peers in the academic world were con- 
cerned, Friedman's famous assertion that changes in 
the money supply cause changes in prices fell by the 
wayside on the last page of his magnum opus, A 
Monetary History of the United States. 37 Friedman 
could not find any consistent behavior for what is called 
the "velocity of circulation" of money during the entire 
postwar period. The way the "quantity theory of 
money" is supposed to work, Friedman reports, is 
according to a turn-of-the-century formula penned by 
Yale professor Irving Fisher, now best-known for a 
prediction in mid- 1929 that the stock market rise proved 
that the United States would have permanent prosperity 
from then on. 38 

The formula reads MV—PT, where M is money 
supply, V is its velocity (how fast people spend it), P is 
the price level, and T is the amount of goods available 
per unit of time. It says that if there is more money and 
people spend it faster, prices will rise. 

What Is Fascist Economics? 59 

The "bogey" variable is the velocity of circulation, or 
V. Monetarists, from Jevons and Marshall a century 
ago to Friedman now, have put tomes of statistics 
through analysis in an attempt to explain why V goes 
up or down — without measurable success. Friedman 
admitted as much in his Studies in the Quantity Theory 
of Money and later in his 1963 monetary history, finally 
giving up the attempt in his 1970 "debate" with his 
Keynesian opponents. 39 

In conclusion, that leaves us with a theory that says 
that if there is a lot of money about, individuals are 
likely to Have a lot of it; the "theory of nominal 
income." It should not be a surprise that Friedman's 
academic opponents do not come outright and say that 
all of Friedman's theories are irrelevant, boring non- 
sense, considering the quality of their own opposing 
theories, although they have occasional fun pointing 
out Friedman's record of off-the-mark predictions. 40 

At the outset, we answered the question "What is 
fascist economics?" by analogy to loan-sharking 
methods — the looting of the flesh and bone of the 
economy to maintain the value of paper claims to 
income. Milton Friedman's personal contribution to 
fascist economics adds another dimension to this an- 
swer. British System, or monetarist, economics will 
invariably create monetary crises. The instinctive re- 
sponse of British System economists is to force negative 
growth policies onto already depleted economies to 
defer, but in reality worsen, the monetary crisis. The 
consequences of repeated looting of real economic 
resources are, as Hitler put it, to base "the stability of 
our currency" on "the concentration camps." 

60 The Ugly Truth About Milton Friedman 

Not every public figure or economic policy-maker 
committed at a given moment to monetarist principles 
is a fascist; the fascists distinguish themselves by making 
their irrationalism a matter of pride. That is what makes 
Milton Friedman so evil. It is not merely that the inner 
content of his economics is fascist, but that he demands 
the destruction of every criterion of reason that might 
hold us back from the horrifying final consequences of 
his policies. 




The truth is that the public interest is not, as is 
widely believed, the sum of private interests, but its 
opposite. Consequently, the real political problem 
is finding a system whereby the general interest can 
prevail against the aggregate of individual wills. 
— Jacques Rueff, 1964 

France's brilliant monetary economist, Jacques Rueff, 
is known in the United States as an opponent of John 
Maynard Keynes, but not of Milton Friedman, his 
opponent in a twenty-year struggle over the future of 
the international monetary system. More importantly, 
the American conservatives who have expressed their 
high regard for Rueff do not understand his accom- 
plishments, and, in their ignorance, what has been lost 
is the knowledge of how "American System" economics 

Rueff towered above the squabble between the 
"monetarist" and "Keynesian" versions of British Sys- 
tem economics, and located himself in the continuity of 

62 The Ugly Truth About Milton Friedman ^^_ 

Benjamin Franklin's collaboration with the founders of 
the ficole Polytechnique. As the author of President de 
Gaulle's great launching of the French economy in the 
years after 1958, he emerged at the end of a long career 
not only as an economist of great stature, but as one of 
America's best friends abroad — the persistent critic of 
America's self-destructive course. 

It is not outrageous to identify Jacques Rueff as a 
"protectionist" in the American System sense of the 
word. His objective was to design the credit system to 
protect the productive sectors of the economy from 
speculative abuses through misuse of the public credit. 
Specifically, the task of monetary policy is to bind the 
individual will to the national purpose, by identifying 
the prosperity of the individual with the economic 
growth of the nation, "finding a system whereby the 
general interest can prevail over the aggregate of indi- 
vidual wills." Bitterly opposed to the Keynesian mode 
of government intervention, which breeds inflation by 
promoting nonproductive investment, Rueff wielded 
power as de Gaulle's economic plenipotentiary as a 
dirigiste in the tradition of Jean-Baptiste Colbert. 

In modern form, Rueff s economics are an extension 
of Alexander Hamilton's 1790 Report on Public Credit. 
The state must destroy speculation in its public debt, 
Hamilton wrote, because "being only an object of 
occasional and particular speculation, all the money 
applied to it is so much diverted from the more useful 
channels of circulation . . . [and is] a pernicious drain of 
our cash from the channels of productive industry." 
The task of monetary policy is to ensure that sufficient 
credit resources are available to "the channels of pro- 
ductive industry," to "enable both the public and 

Rueff versus Friedman 63 

individuals to borrow on easier and cheaper terms," 
said Hamilton. 1 

American System economics is a moral science. The 
standard for judging alternative policies is their impact 
on the moral and intellectual powers of the population. 
For Hamilton, Mathew and Henry Carey, Friedrich 
List, and other leaders of the American School, eco- 
nomics was the science of nation-building. For them, as 
for de Gaulle and Rueff, the republican nation-state 
was the vehicle for the perfection of its citizens, for the 
continuous enhancement of their ability to master sci- 
ence and culture. The task of the nation-state is to 
protect the resources of its citizens, not the least of 
which its public credit, from their internal and external 
enemies. The Careys and List fought successfully for 
trade protection, against Great Britain's attempts to 
undermine American and German industrialization 
through commercial war. Rueff, who dissolved many of 
France's trade barriers into the European Economic 
Community founded by de Gaulle and West German 
Chancellor Konrad Adenauer, was no less a "protec- 
tionist" in his campaign to destroy speculative en- 
croachment on the French, and later the international, 
monetary system. 

Rueff demanded that competent monetary policy 
ensure that public finances follow the development of 
real economic resources. The potential for economic 
growth — namely, the surplus of goods available for 
investment into new production — must be matched to 
the pool of credit that will finance these investments. 
But this credit pool is made up of the savings of 
thousands of households and corporations. If govern- 
ment policy has cheated citizens by investing their 

64 The Ugly Truth About Milton Friedma n 

savings nonproductively, thereby creating inflation, 
they will refuse to invest, unless Hjalmar Schacht and 
men in black uniforms are there to make such saving 
and investment compulsory. 

That is the situation de Gaulle faced after his dra- 
matic accession to power in 1958, averting a fascist 
coup in preparation. The Algerian war (which de Gaulle 
quickly ended) and other nonproductive government 
excesses had left France with the weakest currency 
among the major European nations, high and rising 
inflation, and a $2.5 billion budget deficit — huge rela- 
tive to the size of France's economy and then-prevailing 
currency values. The reaction of the French population 
to creeping economic disaster was predictable; fleeced 
many times in the past, they behaved like scared sheep. 
French citizens either sent their capital abroad in the 
form of purchases of stronger currencies, or, more 
importantly, buried it in the ground in the form of gold. 
The "lying" monetary policy of the French government 
had turned the "individual wills" of French citizens into 
those of raving anarchists. Private gold hoards alone 
were estimated at 3,000 tons, or $2.5 billion at the then 
$35 per ounce gold price — about equal to the 1958 
budget deficit. 

The emergency plan Rueff drew up for de Gaulle — 
and de Gaulle acted upon — did not propose to reduce 
inflation through fiscal austerity, but through increased 
investment in the productivity of the French economy. 
The possibility of breaking the inflationary cycle in such 
Promethean fashion — to use Rueff s word for his ap- 
proach — could never occur in the irrational mind of a 
Milton Friedman. The plan worked because Rueff 
convinced the French population that it would work, in 
one of the most striking calls to action issued by any 

Rueff versus Friedman 65 

government. His task force at the French finance min- 
istry wrote in 1959: 

"The history of France has entered upon a new phase. 
The wave of productivity upon which she has risen will, 
within a few years, create a young country, facing the 
future with eagerness, and once more equal to the 
highest destiny. In an inspired effort of anticipation — 
by an unprecedented economic expansion — the country 
has already prepared the means of its recovery. 

"But the growth achieved has not yet nearly reached 
the level called for by the nation's responsibilities. 

"If it were desired merely to maintain the existing 
level of development of an increased population, it 
would be necessary to invest immense sums in schools, 
in infrastructural development, in construction of hous- 
ing and in job opportunities. 

"Yet to do no more than this would be to remain 
hopelessly inadequate to the task. To accomplish the 
task would mean, in the course of the coming years, 

• To develop the Sahara; 

• To raise the standard of living of the peoples that 
have lately reaffirmed their loyalty to and confidence in 

• To modernize the national defense; 

• To develop and convert power installations so as to 
retain the benefits of technological progress; 

• To continue modernization and growth of produc- 
tive plant in the spheres of agriculture, industry, and 

• To improve facilities for scientific research; 

• To expand medical and hospital services; 

• To foster the advance of social welfare by all 
suitable means. 

"At the same time France is under a basic imperative 

66 The Ugly Truth About Milton Friedman 

to remedy, without delay, the housing crisis that is 
undermining her social structure, freezing the distribu- 
tion of labor in a manner highly injurious to industrial 
progress, inflicting cruel and unjust suffering on wide 
sections of the population and turning them into con- 
firmed enemies of the social order. 

"For many years to come, all France's problems will 
be problems of investment. France will not be taking 
full advantage of the opportunity that offers unless 
these are successfully solved, not in a spirit of apathy 
and decadence, but with the dedication called for by the 
task to be accomplished and by the greatest rewards to 
be won." 2 

From his command post in the finance ministry, 
Rueff used the same method as Lyndon LaRouche in 
campaign appearances before "town meetings" during 
the 1980 presidential primary campaign: appeal to the 
morality of the population. The most criminal facet of 
inflationary economic policies is their effect on the 
moral outlook of the population, breeding an every- 
man-for-himself outlook. France underwent in 1958 the 
same kind of crisis the United States is going through 
now. British System economic mismanagement leads to 
a threshold of economic breakdown. The crisis is re- 
solved either by Schacht's blackshirt methods, or by 
throwing out the British System. But that cannot be 
done simply by putting the right policies on paper. As 
Rueff knew, the first step is to correct the damage done 
to the moral powers of the population. Once the popu- 
lation is committed to an economic program founded 
on science and technology, economic recovery is possi- 
ble. That was the cutting edge of Rueff s plan to break 
the inflationary cycle. 

Rueff versus Friedman 67 

The immediate problem was the enormity of the 
French budget deficit, Rueff threw out all the mystical 
nonsense about "balanced budgets" and "inflationary 
government spending" now circulated in the United 
States by Friedman and his dupes. He noted, with some 
scorn, that while Anglo-American economists call a 
deficit whatever the government spends in excess of tax 
revenues, French economists are concerned only with 
spending in excess of what the government can tax or 
borrow. 3 If the government can finance expenditures by 
convincing savers to buy its securities, it is not in deficit. 
"We have inflation because there are not enough sav- 
ings on the market; and there are not enough savings 
. on the market because there is inflation. The problem is 
to get out of this vicious circle. . . . The way to do it is 
create a situation of certainty that the public expendi- 
ture will in no case exceed the cumulative sum of 
receipts from taxation and savings." 4 But Rueff did it 
not by cutting expenditures, but by increasing savings. 

"We have been told that our plan was a deflationary 
one," his finance ministry report continued. "This was 
a dreadful lie; the [1959] budget in its present state 
includes 28 percent more investment than the 1958 
budget and, as a result, we are going to be able to carry 
out all the tasks which had been written into our 
budget, in other words, the building of schools, hous- 
ing, the development of atomic energy, our energy 
policy in general, the equipment of our nationalized 
industries, the equipment of Algeria, all the projects of 
the Economic and Social Development Fund, which 
will be carried out according to plan." 5 

Getting the savings to invest in these projects was a 
trivial matter, said Rueff, once the population believed 

68 The Ugly Truth About Milton Friedman 

that the economy was on the road to higher productiv- 
ity. "The supply of savings on the market — whether 
derived from current savings or from savings previously 
hoarded — is by no means unchangeable. It is controlled 
by individual decisions, and especially by the responses 
of savers to the monetary outlook. . . . Investment of a 
small share of [the hoarded gold] in French securities 
would substantially expand possibilities of issue on the 
market, and would, other things being equal, contribute 
decisively to the solution of our investment problems." 6 
He was right. Within the next year, the Banque de 
France took in 1 50 tons of gold, which hoarders gave 
up in return for sound Treasury securities. 

Both Friedmanite "fiscal conservatism" and Keyne- 
sian "fiscal stimulus" will fail, Rueff repeated until his 
colleagues understood it. "At present, concern for less- 
ening the deficit in public finances takes the form of 
penurious restriction on the amount of investments 
undertaken by the Treasury. And yet that amount is 
never limited sufficiently to arrest the process of pro- 
gressive deterioration characteristic of inflation; the 
limitation is sufficient, though, to prevent contempla- 
tion of all the increased investments that the present 
situation requires. A chasm yawns between the jealously 
restrained and hotly debated investments we appropri- 
ate to plans of modernization or to housing construc- 
tion programs, and the recovery that would be made 
possible by restoration of a real money market. All the 
past experience goes to show that so far from sacrificing 
investment, an end to inflation would call forth those 
financial resources essential to the joyful accomplish- 
ment, without glum negation, without paralyzing dis- 
tinctions, of the tasks with which circumstances are 
confronting France." 7 

Rueff versus Friedman 69 

Stopping inflation — by increasing investment in pro- 
ductivity of labor and eliminating unproductive spend- 
ing — "will promptly bring abundant repatriated capital 
into the financial market, lower all interest rates — 
especially long-term rates — significantly, and thereby 
expand capacity for public or private credit." 8 

Rueffs package became law on December 7, 1958. 
By March, $600 million of French savings held abroad 
had returned to the French money markets. Inflation 
fell during 1959 to 4 percent — about half its previous 
level. France's foreign payments balance corrected from 
a $100 million deficit in 1958 to nearly $2 billion in 
surplus the next year. Industrial production rose by 12 
percent. All in all, the economic results of 1959 were the 
best since Liberation. "Some of our early critics, when 
confronted with actual facts, called this a miracle," 
Rueff wrote ten months after his program went into 
effect. "The speed of change was so surprising that they 
insisted it was the result of exceptional circumstances. I 
beg to differ. Everything that has taken place in France 
in economic and financial terms since January 1959 is 
absolutely normal. All the results recorded since then 
have been the direct and unavoidable consequences of 
the reforms of December 27, 1958." 9 

The method of the American System 

From this account, it is clear how far Rueff stands 
above the mindless quibbling over monetary technicali- 
ties we reviewed at the conclusion of the last chapter. 
The debate between Friedman and the Keynesians over 
whether fiscal and monetary stimulus will increase 
production or increase prices is irrelevant. High rates of 

70 The Ugly Truth About Milton Friedman 

economic growth based on investment in new technol- 
ogies are "absolutely normal," Rueff demonstrated. 
The only issue in monetary policy is to see to it that the 
monetary system and the real economy are in alignment, 
that credit flows to productive investments. 

LaRouche's economic methodology defines with rig- 
or the need for industrially oriented credit expansion 
through sound national banking practices. Although 
Rueff, in reaction to the spread of Keynes's influence in 
the 1950s and 1960s, expressed great caution against 
money expansion of the Keynesian variety, he was in 
agreement with LaRouche on this point. 

Following the principles of national accounting uni- 
versally accepted until the advent of John Stuart Mill 
and subsequent chicanery in the economics profession — 
LaRouche analyzes the value of the economy's tangible 
output in terms of the reproduction costs of capital and 
labor inputs at the economy's existing scale, or constant 
capital (C) and variable capital ( V); the overhead costs 
of the economy, including education, health, national 
security, as well as various forms of unneeded waste, or 
d; and a surplus of tangible output above overhead 
expenses, or S - d, or S\ 

Contrary to the Malthusians and Milton Friedman, 
the production and subsequent productive investment 
of 5' is not a privilege but a fundamental condition of 
continued economic existence. That margin of society's 
resources available for employment of additional popu- 
lation or more productive employment of the existing 
workforce, defined by S\ represents more than simple 
economic growth at existing technological levels. The 
mere growth of an economy within a fixed technological 
mode — something that never occurred and could never 
have occurred for any significant period of economic 

Rueff versus Friedman 71 

history — would rapidly produce a crisis of scarce re- 
sources. The more successful a given technological level, 
the more rapidly it exhausts the materials that that level 
of technology defines as resources. What the Club of 
Rome argues to be a "final solution" for economic 
growth is the perpetual challenge to science of the past 
10,000 years of economic history. Without successively 
defining domestic animals, water power, coal, oil, and 
nuclear fuels as power sources, the human species would 
have ceased to exist long ago. 

The relevance of this to monetary economics is direct 
and immediate. New technology can only be introduced 
into economies through state-directed creation of credit, 
under the national banking systems first invented by the 
nation-builder Jean-Baptiste Colbert in the seventeenth 
century, and subsequently refined into the modern form 
by Alexander Hamilton in his 1790 Report on the Public 
Credit. The monetary equivalents of our divisions of the 
gross tangible output of an economy — C, V, d, and 5" — 
are not necessarily in direct correspondence with the 
actual produced wealth. In general terms: 

Constant capital = total purchases of raw and inter- 
mediate materials, and manufacturing and other equip- 

Variable capital = total wages of goods-producing 

d = total interest, rent, profit and salaried income of 
nongoods-producing workers; 

5" = all households' savings plus corporate profits, 
also called corporate savings. 

Savings are the national fund for investment. By 
centralizing these savings, the equity markets and finan- 
cial institutions provide capital to corporations and 
entrepreneurs to purchase those goods corresponding 

72 The Ugly Truth About Milton Friedman 

to S" for new investment. However, even under condi- 
tions of relative prosperity, the unconsumed portion of 
monetary income, or savings, is inferior to the total 
volume of tangible output available for new productive 
investment. Under conditions of rapidly rising labor 
productivity, through the absorption of new technolo- 
gies into the production process, the total output ex- 
pands faster than savings available either as risk-capital, 
or equity, or loan-capital. Various anarchistic radicals 
take this to imply some fundamental "contradiction" in 
capitalism, in the form of the silly "buy-back" problem 
that states that the capitalist pays workers less than the 
value of the goods they produce, thus making the 
workers unable to buy back the product of their labors. 

In fact, competent national banking policy works to 
add a margin of state-created fiat credit to the pool of 
savings, corresponding to the amount of S' produced in 
excess of savings. Central banks create money by pur- 
chasing government securities or commercial paper in 
return for the fiat currency of the central bank. Under 
capitalist finance, the central bank works in cooperation 
with private commercial banks, purchasing either their 
holdings of government securities or other paper. In the 
United States this is "discount window borrowing" at 
the Federal Reserve. However, central banks must be 
cautious, ensuring that the bank notes printed are used 
to purchase capital goods for expanding production. If 
such fiat money were distributed in some other way, it 
would tend to inflate the currency, with only some 
portion of that inflation offset by capital purchases. 

As long as the state creates money through lending 
by national banks to purchasers of productive capital, 
no error is introduced. If the investment is sound, the 
wealth put into circulation by the new production will 

Rueff versus Friedman 73 

exceed the money created to enable the investment. 
Rueff s emphasis on these points is entirely correct. He 
insisted that the central bank must limit its expansion of 
credit to "real bills," that is, to commercial paper 
representing an exchange of useful goods. "There can 
be no inflation as long as the quantity of currency in 
circulation is proportional to the total volume of desired 
cash holdings. In other words, as long as any increase 
in the money supply is desired [for circulation of real 
wealth], it has no effect on prices. There is no inflation 
as long as the money supply reflects a need for more 
liquidity." 10 

Rueff s treatment of the investment problem during 
the 1958 crisis is in harmony with LaRouche's statement 
of the need to keep interest rates significantly below the 
average rate of profit, so that interest costs as such do 
not inhibit long-term capital investment and penalize 
risk-capital in favor of debt-capital. As the 1958 "mira- 
cle'* showed, by ensuring that state finances contribute 
to productive investment and penalize nonproductive 
investments, the aggregate of produced wealth rises 
faster than payments obligations, reducing inflation. 
This permits industrial investors to attract an orderly 
flow of savings at low interest rates. 

In a capitalist economy, there are two "rates of 
profit": the rate of profit on capital, and the rate of 
creation of free energy in the form of tangible wealth. 
The first is measured by the prevailing rate of interest 
and rate of return on industrial equity, adjusting for 
risk and liquidity. The second is expressed by the term 
S'/(C + V), or the amount of investible surplus pro- 
duced in any given period divided by constant plus 
variable capital expenditures, or economic maintenance 
costs. Inflation occurs when demands for revenue on the 

74 The Ugly Truth About Milton Friedman 

part of paper capital exceed the "real" profit in tangible 
terms of the economy. Since interest rates reflect infla- 
tion, inflation becomes self-feeding at the point that 
interest rates rise above the rate of return available to 
industrial equity — precisely the formula Keynes pro- 
posed in order to restrict industrial investment. 

The introduction of new technology is the means by 
which tangible profit may rise at a faster rate than paper 
profit. The contraction of equity investment thus puts 
the economy into a spiraling industrial decline. Con- 
versely, investment policies that channel available capi- 
tal into realization of new technologies produce a fall in 
the general price level, the "typical" condition of the 
U.S. economy during the late nineteenth-century indus- 
trial boom. 

The contrary argument, which Milton Friedman pla- 
giarized from opium-trade economist David Ricardo, 
insists that money expansion must remain fixed in all 
cases. In particular, it militates against the mere possi- 
bility of credit expansion through a private banking 
system, through so-called 100 percent reserve banking, 
a favorite Milton Friedman prescription since 1947. n 
Only under extraordinary conditions would the avail- 
able supply of savings be sufficient to reinvest the 
margin of expansion of total output, or S', under 
conditions of fixed technology. Introduction of new 
technologies, which increase the rate of increase of 
economic expansion, would be flatly impossible, ac- 
cording to Friedman. In opposition to Rueff, the 
Chicago School and its Vienna School counterparts 
demand a Malthusian regime of zero technological 
growth, under the pretext of opposing "inflationary" 
credit expansion. 

Rueff versus Friedman 75 

Credit expansion of the nonproductive, Keynesian 
variety is inflationary; but the monetarist effort to turn 
this possibility into an argument for the end of Hamil- 
tonian national banking is a fraud. 

At the height of his career, Rueff grounded his econom- 
ics in Charles de Gaulle's political leadership, and this 
is the explanation for why his economic policies worked. 
Economics is a moral science, whose success depends 
upon rallying the population to that sense of national 
purpose that Friedman scorns as unnecessary. The 
tradition upon which the American System rests, is that 
tradition of nation-builders that sees economics as the 
science of uplifting the moral and intellectual powers of 
the population. This includes the Carey-List faction of 
economists in the United States and Germany a century 
ago; the French nineteenth-century economists Claude 
Chaptal and Charles Dupin; Louis XIV's finance min- 
ister Jean-Baptiste Colbert; and the "American faction" 
of Benjamin Franklin's European collaborators. La- 
Rouche's conception of economics as physics — through 
which the enhanced mental powers of mankind are 
mediated — prevailed among the leading French econo- 
mists of the American Revolution years, including 
Lazare Carnot, Gaspard Monge, and their students of 
the Ecole Polytechnique. Rueff, whose closest intellec- 
tual collaborator was the great French physicist Louis 
de Broglie, argued passionately for the identity of moral 
and physical science: 

"If the moral order is the outcome of an orientation 
of the behavior of a human being with regard to himself 
and the order of law — mainly of his behavior in relation 
to other human beings — then the economic order is the 

76 The Ugly Truth About Milton Friedman 

result of the orientation of the behavior of human 
beings in the administration of their earthly habitat, 
including its planetary and possibly its stellar exten- 
sions — that is to say, all the goods the universe has 
placed at their disposal." 12 Man transforms the universe 
through "Promethean intervention," Rueff wrote. 

Rueff conserved for modern France the great tradi- 
tion of Carnot's students Charles Dupin and Claude 
Chaptal. These economists took Carnot's definition of 
higher forms of self-organization of energy in physics 
as their starting point, drawing on Alexander Hamil- 
ton's concept that the sole measure of wealth was the 
rise in the productive powers of labor. Dupin wrote in 

"I call productive powers the unified powers of men, 
of animals and nature, applied through labor in agri- 
culture, manufacture, and trade. These powers do not 
stand still; they grow with the rise of peoples and decline 
with their fall. In the case of our country I have tried to 
measure not their present value, but their rate of 
growth, which must be the gauge of all our hopes. . . . 
These powers have no pure material and physical effect: 
their regulator, brake and accelerator are human spirit, 
patience, and will power. For this reason, the capacity 
for reason and morality of peoples is necessarily and in 
the closest possible way connected with their productive 
and commercial powers." 13 

One can see Rueff nodding in agreement with For- 
bonnais, the chief economic theoretician of the "Amer- 
ican party" in eighteenth-century France: 

"Only credit which is actually directed toward the 
production of real income is worthy of the name wealth. 
Properties which bring forth no annual production 
incorporate only a sort of wealth that draws income, 

Rueff versus Friedman 77 

but is not wealth in its real meaning; we will call such 
properties 'commodities.' For this reason land that does 
not produce and industry that does not manufacture, 
that is, bring new wealth into circulation, are not real 
wealth; they merely represent commodities which might 
indeed be transformed into wealth, if they are set into 
motion." 14 

The entire success of Rueff s 1958 program is based 
on a comprehension of the difference between produc- 
tive and nonproductive investment. That Rueff did not 
solve the problem of deterministic models of economic 
growth, which began with LaRouche's 1951 work on 
the implications of Riemannian mathematics for eco- 
nomic science, is beside the point for our purpose here; 
we will present LaRouche's solution, with the results of 
the LaRouche-Riemann computer-based economic 
model, in the final chapter. 

What is more important is Rueff s role as an interna- 
tional statesman during the 1960s and 1970s, in the 
cause of a new world monetary system. Again, Rueff s 
role stands in the tradition of the "Grand Design" of 
his predecessors, including Chaptal and Dupin, whose 
work was determining for the success of Friedrich List's 
German Zoilverein (Customs Union) and the exponen- 
tial growth of German industry. 

The monetary system: 
the crux of the issue 

The year 1958 marked a turning point in the postwar 
period, in which de Gaulle's coming to power was an 
international event of the greatest importance. De 
Gaulle and Rueff brought France into economic alii- 

78 The Ugly Truth About Milton Friedman 

ance with Konrad Adenauer's West Germany in the 
European Common Market, the foundation of a new 
Grand Design for world economic development and 
international security. Rueffs reforms and the Common 
Market created an economically strong Europe and a 
bloc of strong European currencies for the first time 
since the end of the Second World War, at the same 
time that the U.S. dollar began to show the weakening 
effects of the flawed international economic policy 
America had adopted under the Truman administra- 
tion. The American payments deficit and sterling and 
dollar crises of the 1960s led in a direct line to the 
catastrophic events of August 1971, when the Nixon 
administration removed gold backing from the dollar. 

To Rueff, this consequence was the foreseeable result 
of the defects in the International Monetary Fund- 
centered monetary system, and he fought for its reform 
until the end of his life. Others foresaw the demise of 
the dollar, from the City of London and Wall Street 
side, but thought it untimely to announce prematurely 
that "controlled disintegration of the international 
monetary system is a legitimate objective," as the New. 
York Council on Foreign Relations did at length in a 
1979 study. There is one exception: From the early 
1950s onward, Milton Friedman demanded "controlled 
disintegration" of the monetary system, specifying the 
unfortunate steps that President Nixon would take in 

With hindsight, we know that only two paths could 
emerge from the unstable trajectory of the monetary 
system founded at Bretton Woods in 1944: The Grand 
Design of de Gaulle, Pope Paul VI, and LaRouche; or 
the "controlled disintegration" project of the Anglo- 

Rueff versus Friedman 79 

American financial oligarchy. These two policies now 
coexist, embodied in the European Monetary System 
and the International Monetary Fund, in a situation of 
dual power. Retrospectively, the monetary history of 
the 1960s was a debate between Ruefif, LaRouche, and 
others in one camp, and Milton Friedman in the other. 
Although Friedman comes from the "mainstream con- 
servatism" of Wesley Clair Mitchell and Arthur 
Burns — later we will show what a hoax this is — he has 
carved out a role as a "fringe element" who blurts out 
policies that his more "respectable" colleagues do not 
wish to state. 

The Marshall Plan, as Secretary of State George 
Marshall first envisioned it, was to carry out Roosevelt's 
threat to dismantle the British Empire and replace it 
with a regime of American-sponsored world develop- 
ment. It became the 180-degree reverse in implementa- 
tion. The State Department Policy Planning Staff 
turned effective control of the plan over to Britain, and 
diverted the largest single share of Marshall Plan aid, 
$3.4 billion of the $14 billion total, to London. 15 Instead 
of piercing the boil that the pound sterling left on the 
international monetary scene after the war, the Marshall 
Plan, as well as the International Monetary Fund, 
bailed out the sterling monetary area, building into the 
monetary system a detonator for the exchange crises 
that exploded in the late 1960s. 

The Marshall Plan undermined the dollar's long-run 
stability by intentionally restricting American exports to 
war-stricken Europe. Europe was compelled to rebuild, 
in some cases literally, out of its own rubble. The 
Marshall Plan's official target was to reduce European 

80 The Ugly Truth About Milton Friedman 

imports from the United States to $2.7 billion for 1952- 
1953, against $3 billion in 1938— at the trough of the 
Depression — and $6.7 billion in 1947. Under the direc- 
tion of British treasury official Sir Eric Roll, Harlan 
Cleveland (now chairman of the Aspen Institute), and 
George Kennan's State Department planners, the Mar- 
shall Plan succeeded in reducing America's exports to 
trifling levels compared to those of other industrial 
countries. Britain offered America the status not of a 
world industrial power but of a rentier. 

After the European currency devaluation of 1947 
(begun by the British with the secret connivance of the 
American Treasury) and the postwar collapse of Euro- 
pean wage-scales, American investors could buy capital 
and labor in Europe at roughly one-quarter the compar- 
able American prices (although at considerably lower 
productivity levels). Private capital, not industrial ex- 
ports, flowed across the Atlantic to Europe; most 
American exports were food or coal supplies. 16 

Simultaneously, the International Monetary Fund, 
the central monetary institution formed at Bretton 
Woods, imposed a "fiscal austerity" regimen on devel- 
oping nations, preventing them from absorbing large- 
scale American industrial exports, which would have 
implied trade deficits forbidden under the IMF's Rules 
of Agreement. 

America became a continental, not a world, industrial 
power, hemmed in by the postwar monetary blueprint 
authored by John Maynard Keynes, Britain's negotiator 
at Bretton Woods. From a position of unchallenged 
strength at the war's end, the American dollar became 
a deficit currency by 1958 and a bankrupt currency in 
1971. The era of dollar weakness began as soon as 

Rueff versus Friedman 81 

Europe, by virtue of enormous and prolonged sacrifice, 
recovered from the war, despite the flawed Marshall 

The dollar's obituary was already the subject of 
memoranda among Marshall Plan economists in 1950, 
when Robert Triffin, the bright young man of the 
"Austrian School" of von Hayek and von Mises, be- 
came Special Advisor on Policy, Trade and Finance to 
the Economic Cooperation Administration, the govern- 
ment agency that administered the Marshall Plan. Un- 
der him worked Milton Friedman, newly notorious for 
his extreme monetarist views. Triffin, a Jesuit-trained 
Belgian, came to the U.S. government via Harvard 
University. He became the leading postwar proponent 
of Keynes's original scheme to eliminate the dollar as 
an international currency altogether, in favor of a "one- 
world" currency like the present Special Drawing Right 
controlled by the International Monetary Fund. Fried- 
man, his consultant, took the apparently opposite, but 
actually compatible position that chaos should be al- 
lowed to take its course, in a memorandum later 
republished as "The Case for Flexible Exchange 
Rates." 17 

Under what were considered normal conditions until 
1971, central banks maintained the respective prices of 
their currencies against each other and against an 
international standard, gold. World trade necessitates 
such stability. If the values of currencies shifted contin- 
uously, exporters, importers, and international investors 
would have no way of knowing what the future price of 
the currencies they are to be paid in would be, except 
through enormously expensive hedging operations. But 
Friedman insisted that chaos should be the acceptable 

82 The Ugly Truth About Milton Friedman 

norm of economic affairs, and nations should accept 
that notion by abandoning fixed rates: 

"The nations of the world cannot prevent changes 
from occurring in the circumstances affecting interna- 
tional transactions. And they would not if they could. 
For many changes reflect natural changes in weather 
conditions and the like; others arise from the freedom 
of countless individuals to order their lives as they will, 
which it is our ultimate goal to preserve and widen; and 
yet others contain the seeds of progress and develop- 
ment. The prison and the graveyard alone provide even 
a close approximation to certainty." 18 

In particular, Friedman justified the floating rates 
regime on military grounds: "A really serious rearma- 
ment drive is almost certain to produce inflationary 
pressure, differing in degree from country to country 
because of differences in fiscal structures, monetary 
systems, temper of the people, the size of the rearma- 
ment effort, etc. With rigid exchange rates, these diver- 
gent pressures introduce strains and stresses that are 
likely to interfere with the armament effort." 19 

Friedman cannot be accused of lack of foresight here. 
America formally agreed to end the world role of the 
dollar in 1965, after Treasury Secretary Henry Fowler 
told Lyndon Johnson that if he wanted to finance the 
Vietnam War, he would have to junk the dollar for the 
IMF's Special Drawing Rights, historian William 
Wiseley reported. Wiseley noted maliciously that Brit- 
ain's Field Marsha! Lord Carver persuaded the United 
States to get into Vietnam in the first place. Vietnam 
did not create the 1960s dollar crisis any more than the 
Algerian conflict created the French franc crisis of 1958, 
but it did provide the final blow. 

Rueff versus Friedman 83 

Friedman added to this prescription in late 1968 — 
when he began to advise Richard Nixon, the President- 
elect — that the United States should eliminate gold 
from the monetary system, and "set the dollar free by 
stopping pegging the dollar." He told an American 
Economics Association conference gleefully, "Each of 
these steps is within the unilateral control of the U.S. 
No other country can by its action prevent us from 
taking them." 20 The most Europe could do in response 
to shotgun monetary diplomacy, Friedman suggested, 
was "to try to set up a kind of gold bloc whose 
currencies would be linked at fixed rates to one another 
but fluctuate as a group vis-a-vis the dollar." In August 
1971, to the disbelieving outrage of the Europeans, 
Nixon took Friedman's advice, at the urging of then 
Undersecretary of the Treasury Paul Volcker. 2i 

Friedman's vision of a "gold bloc" in Europe accu- 
rately describes the first, present phase of the European 
Monetary System, which European leaders envision as 
"the seed-crystal of a new world monetary system." In 
effect, Friedman boasted that European monetary sta- 
bilization efforts could be contained to that continent, 
and that the American policy of "controlled disintegra- 
tion" would prevail in world affairs. 

Jacques Rueff was determined that this would not 

Instead of abusing the dollar's international accept- 
ability as a reserve currency by running continuous 
payments deficits, he argued in a June 1961 essay in the 
Paris daily Le Monde that the United States should pay 
its foreign obligations in gold. Rueff did not suggest 
that the United States should give up its gold stocks (as 
it did, in fact, give up half of them before 1971). He 

84 The Ugly Truth About Milton Friedman 

instead proposed an increase in the gold price relative 
to all currencies, which would enable America to meet 
its foreign obligations in gold. The contents of the Le 
Monde article, which Rueff had earlier sent to President 
de Gaulle in memorandum form, set off an international 
controversy that lasted throughout the 1960s. Until 
LaRouche's 1974 "Golden Snake" proposal, which 
projected what later became Phase One of the European 
Monetary System, Rueff was the authoritative spokes- 
man for the politics of the Grand Design in the mone- 
tary sphere. Relative to LaRouche's more comprehen- 
sive formulation of the required new international 
monetary system, Rueff s plan was simple, but no less 
effective. The United States was an underexporting 
nation, Rueff wrote, and required a discipline by which 
to correct the tendency toward rentier status of the 
postwar period. 

Emphatically, the problem was not excess money 
supply creation: "Internal credit expansion has not been 
the main fault of the system. The main fault of the 
system has been the gold-exchange standard," the sys- 
tem by which America could compel other central banks 
to treat its IOU's as the equivalent of gold. 22 The 
problem could not be dealt with by tightening domestic 
money conditions in the United States: "It would be 
much more complex than is generally recognized in the 
over-simple contentions based on the quantity theory of 
money," Rueff said disparagingly of Friedman's argu- 
ment. 23 The Friedman method of dealing with excessive 
credit creation "aims at offsetting in one single opera- 
tion the cumulative effect of excess purchasing power, 
often of protracted duration ... in every circumstance, 
if it is to be effective, it must bring on a deflation of 

Rueff versus Friedman 85 

considerable magnitude. It subjects the economy to a 
sort of shock treatment and has a painful impact." 24 
This must be avoided, Rueff wrote. In particular, "in 
no case" should there be a decline in wages. 25 

Therefore, Rueff proposed a rise in the gold price, 
combined with the . obligation to meet international 
deficits through gold transfers, to enable (and compel) 
the United States to make sufficient resources available 
for export — the point of the entire proposal. 26 The effect 
would not be a Friedmanite deflation, but would be 
"slow and gradual . . . hardly perceptible from the 
social point of view." 27 The Rueff plan had nothing 
whatsoever to do with the "invisible hand" regulator in 
British economists' depiction of the nineteenth-century 
gold standard. On the contrary, "due to the substantial 
credit margin they involve, monetary systems based on 
gold are endowed with considerable flexibility and 
afford broad opportunities for contracyclical action by 
the monetary authorities." 28 The gold standard is the 
proper framework for government intervention into the 
economy in a system of sovereign nation-states. 

De Gaulle made the Rueff plan official French policy at 
a February 4, 1965, press conference, at which the 
French President proposed a rise in the gold price that 
would permit the United States to meet its foreign 
obligations — which grew during the 1960s to a swollen 
$61 billion — in gold. This provoked hysteria in London 
and Washington. The London Economist sent econo- 
mist Fred Hirsch to Paris to interview Rueff a week 

The secret of de Gaulle's ability to terrorize London 
on this score is that the Rueff plan was not — as the 

86 The Ugly Truth About Milton Friedman 

London Economist and the American press lied — mere 
French anti- Americanism. On the contrary, as Richard 
Nixon came to understand too late, it was the only 
policy suited to American's national interest. In no way 
did the U.S. balance of payments deficit benefit the 
United States. It benefited London. Dollars leaking 
abroad were jobbed out through the Eurodollar mar- 
ket — the market in foreign-held dollars — by British 
banks. The Eurodollar market, which eventually grew 
to over $ 1 trillion, gave the bankrupt City of London a 
new lease on life. During the 1950s, when American 
payments were still strong, the once-great City of 
London was a virtual ghost town, in which fewer than 
one dozen foreign banking institutions did business. 
Despite liberal infusions of Marshall Plan and Interna- 
tional Monetary Fund assistance, the dying British 
pound could not survive as an international lending 
currency, especially after Eisenhower and Khrushchev 
jointly crushed Prime Minister Anthony Eden's Suez 
adventure in 1956. 

The miraculous rebirth of the City, and its ten-year 
evolution into the world's biggest banking center, began 
with the U.S. payments deficit. Anglophile Secretary of 
the Treasury C. Douglas Dillon and his Undersecretary 
Robert V. Roosa presented the British with an extraor- 
dinary gift in 1962: They concocted a means of making 
it more lucrative to hold dollars in London than in New 
York, thus underwriting London's return to financial 
power. This was the Interest Equalization Tax, which 
penalized American loans to foreigners. Nominally a 
way to stop the outflow of dollars, the tax simply 
enabled dollar-holders to earn a premium by lending 
them out from London, free of tax. 

Rueff versus Friedman 87 

The growth of British banking business that resulted 
was so rapid that in his 1968 pitch for throwing out 
gold, Milton Friedman could tempt American bankers 
with the prospect that "the Eurodollar market will 
shrivel and New York will become in the final decades 
of the twentieth century what London was in the final 
decades of the nineteenth century." 29 As we shall see 
momentarily, New York got the shaft after gold went. 

The Eurodollar market was a highly leveraged, rapid- 
turnover racket of the sort that the British have run 
since the 1773 crisis shifted the Amsterdam capital 
market to London. 30 Its existence and de Gaulle's 
international development objectives were incompati- 
ble. But the de Gaulle policy of industrializing the 
developing sector was the policy Franklin Roosevelt 
had proposed — to Churchill's mortified objections — at 
the 1944 Casablanca conference. 

As LaRouche demonstrates in a forthcoming text- 
book, Mathematical Economics, the extension of indus- 
trialization at the highest levels of technology is the 
least-action path of development for the industrial 
countries themselves. By introducing high-technology 
industry into the so-called Third World, and bringing 
the developing countries' populations into the industrial 
labor force, the advanced sector countries cheapen the 
cost of their imports from these countries, through the 
rise in the productivity of labor in the developing sector. 
In somewhat fragmented form, this is the policy Japan 
has followed with respect to Taiwan and South Korea, 
investing heavily in shipbuilding, steel, and construc- 
tion, and obtaining future imports of Japan's own 
requirements in these areas at low cost. 31 Enunciated by 
de Gaulle, the strategy for international development 

88 The Ugly Truth About Milton Friedman 

was the content of Pope Paul VI's encyclical De Popu- 
lorum Progressio (On the Progress of Peoples), incor- 
porating the policy elements that took their most elab- 
orated form in LaRouche's 1975 International Develop- 
ment Bank proposal. 32 

Industrializing the developing sector, however, was 
not the objective of the 1944 Bretton Woods system. By 
1965 and 1968, meetings of the International Monetary 
Fund had turned into scenes reminiscent of Western- 
movie saloon fights. The Anglo-Americans, following 
Johnson's capitulation to Secretary of Treasury Fow- 
ler's 1965 advice, proposed getting rid of both the dollar 
and gold, in favor of some form of international paper 
standard, along the lines of the original Keynes (later 
Robert Triffin) proposal cited above. This plan, still 
fought out bitterly at the most recent IMF meeting in 
Hamburg on April 26, 1980, would make the Interna- 
tional Monetary Fund a world central bank with explicit 
or implicit powers to dictate financial policy to every 
capitalist country — in the way it already does to Third 
World countries. 

The differences between this arrangement and the 
Milton Friedman plan, which would leave the Interna- 
tional Monetary Fund with the only important base of 
power in the storm of "floating exchange rates," are 
trivial. The content of the international monetary debate 
must be sought at the level of international trade and 
development policy. The British and their American 
friends insisted upon maintaining British imperial policy 
of enforced colonial backwardness and investment in 
raw materials extraction rather than industry. The Eu- 
ropean faction, led by de Gaulle and Pope Paul VI, and 
for which Jacques Rueff was chief economic theoreti- 

Rueff versus Friedman 89 

cian, insisted on financial arrangements conducive to 
long-term, large-scale international development lend- 
ing. Gold standard stability is the indispensable condi- 
tion for long-term capital provision to the developing 
sector. 33 

France's representative to the IMF, Finance Minister 
Michel Debre, blocked the British plan until late in 
1968. Then, in a virtual repeat performance of the 
Jacobin riots in 1789, when Lord Shelburne's agents 
Marat and Danton unleashed the gigantic destabiliza- 
tion of Britain's enemy France, 34 British-controlled an- 
archists initiated the May 1968 events, which weakened 
de Gaulle's political authority. NATO intelligence- 
controlled sections of the French Communist Party 
around Louis Althusser, anarchist ideologues like Jean- 
Paul Sartre, and the directly British-controlled Situa- 
tionist International, combined to initiate a short-lived 
general strike. 

The collapse of the French franc that September 
undermined de Gaulle's ability to guide international 
monetary affairs, and it was the unpleasant job of a new 
finance minister, Valery Giscard d'Estaing, to go to the 
International Monetary Fund and make a temporary 
peace with the British. De Gaulle's ouster and the 
accession of Willy Brandt's Social Democrats to power 
in West Germany put the world on direct course to- 
ward the August 1971 debacle, and postponed the inter- 
national development strategy for another decade. 35 

How much the United States lost when its great 
wartime ally and postwar friend Charles de Gaulle 
departed office is not understood by most Americans. 
President Nixon is one of the few who had an inkling; 
he saw the postwar political leadership of the West "in 

90 The Ugly Truth About Milton Friedman 

the shadows of those two giants, Eisenhower and de 
Gaulle." 36 Despite Nixon's great personal regard for de 
Gaulle, his comprehension of what the French President 
and his adviser Rueff represented was subminimal. 

How little Nixon understood is evident in his decision 
to make Milton Friedman the guiding economic policy 
voice of the first two years of his administration, until 
Friedman's money program had put the United States 
into deep recession by 1970. But Nixon carried out the 
full Friedman program on August 15, 1971, with the 
addition of the wage-price controls demanded by "pop- 
ulist monetarist" Henry Reuss. 37 

What is of greater importance here is that we honor 
this nation's debt to Jacques RuefF, emphatically be- 
cause the United States must now make its final choice 
between Friedman's "controlled disintegration" and the 
Grand Design for international development Rueff 
worked to formulate. There is a continuum between the 
Grand Design to break Hapsburg rule and Jesuit con- 
trol over Europe at the time of Henri IV and his great 
minister Sully; the collaboration of French minister 
Colbert and the German scientist and diplomat Gott- 
fried Wilhelm Leibniz at the close of the seventeenth 
century; the plans of Benjamin Franklin and the "Amer- 
ican faction" around French Foreign Minister Ver- 
gennes; the efforts of the American Cincinnatus Society 
and John Quincy Adams in common with Lafayette and 
the brilliant students of Lazare Carnot; and the Grand 
Design of Rueff, Pope Paul VI, and LaRouche today. 
The fiber of this continuity is the science of economics, 
defined as the self-development of man's command over 
nature, to which LaRouche contributed the unique 
solution of a deterministic mathematical description of 

Rueff versus Friedman 91 

self-developing economic processes. The work of Rueff 
demonstrates how fraudulent are the pretensions of 
Milton Friedman to speak on the subject of economics. 
How it happens that the likes of Milton Friedman 
have the opportunity to make such pretensions over 
public television is a different question, which we now 
proceed to answer. 


Fraud of 

Free Enterprise 

/ need not mention the difficulty of detecting a 
falsehood in any private or even public history, at 
the place where it is said to happen; much more 
when the scene is removed to ever so small a 
distance. Even a court of judicature, with all the 
authority, accuracy, and judgement, which they can 
employ, find themselves often at a loss to distinguish 
between truth and falsehood in the most recent 
actions. But the matter never comes to any issue, if 
trusted to the common method of altercation and 
debate and flying rumors; especially when men's 
passions have taken part on either side. 
—David Hume, in "On Miracles" 

Milton Friedman, in a February 1980 commentary in 
the Times of London, traced his spiritual ancestry to 
David Hume, who, two centuries earlier, had formu- 
lated a quantity theory of money identical, as Friedman 
noted, to the Chicago SchooPs. Friedman's testimony 
in this case is perfectly accurate but incomplete. David 
Hume did not invent the profession of lying, but he did 

94 The Ugly Truth About Milton Friedman 

his best to turn it into a science, as he states in the 
passage cited above. For two centuries, what has come 
down to us as "British System economics" is not 
economics at all, but the art of professional lying as a 
means of social control. As a liar, Milton Friedman is a 
mediocrity. But he stands on the shoulders of great 
predecessors. He has inherited a method that, in the 
extreme form he represents it, leads to explicitly fascist 

We will encounter the following noteworthy lies 
throughout this presentation: 

1. That "British System economics" stands for "free 
trade." In the Orwellian translation, British "free trade" 
means trade warfare, as Hume and Adam Smith di- 
rected it against the young American Republic, and 
against industrial republics since then. 

2. That "British System economics" derived from a 
British-centered Industrial Revolution. The financial 
basis of the British Empire throughout the nineteenth 
century was the opium trade, which also gave personal 
employment to Adam Smith, David Ricardo, Jeremy 
Bentham, James Mill, John Stuart Mill, Benjamin Jow- 
ett, and John Ruskin. Except for temporary advantages 
gained through trade war, Britain's industrial capabili- 
ties were behind those of France starting in the 1 780s. 

3. That British System economists were men of sci- 
ence and reason. They were, according to all contem- 
porary accounts, the sort of kooks the average person 
would avoid on the street. There was Hume, dying of 
obesity; Adam Smith, who lived until his death in his 
mother's house in Edinburgh; Jeremy Bentham, shut up 
at home, the "Hermit of Queen Square Place," 1 talking 
a queer Newspeak language comprehensible only to a 

The Fraud of Free Enterprise 95 

few disciples; James Mill, driving his son John Stuart 
Mill to an early nervous breakdown through strict 
enforcement of Aristotle's program of education. Worst 
of all, there was John Ruskin, the Oxford guru of a 
generation of British imperialists and Cambridge econ- 
omists, immersed in occult practices, celibate after a 
terrifying wedding night, and the inspiration of the 
decadent Pre-Raphaelite group of artists. The greatest 
progress the British System has made is to find a 
spokesman who would not violate the sensibilities of 
decent people on sight, unattractive as Milton Fried- 
man is. 

The same characterizations apply to the Austrian 
School of monetarists who later joined forces with 
Chicago in the Mont Pelerin Society and among whom 
can be numbered such types as Friedrich von Hayek 
and Ludwig von Mises. These products of the Viennese 
salons at the turn of the century are the men who 
trained Milton Friedman's teachers, including the foun- 
der of the National Bureau of Economic Research, 
Wesley Clair Mitchell. Rubbing shoulders with the 
Austrian economists were Ernst Mach, who insisted 
that thought in the physical sciences could have no 
relationship to the physical universe; atonal composer 
Arnold Schdnberg, the founder of "modern music"; 
pornographic playwright Frank Wedekind, author of 
the "Lulu" plays; Wagnerian visionary Theodore Herzl, 
figurehead of the Zionist movement; and a host of 
abstract painters, bizarre poets, and crank scientists 
who made period Vienna a synonym for a terminally 
decadent society. The Austrian economists were rustic 
noblemen patronized by Empress Elizabeth, the sponsor 
of the Viennese counterculture. 

96 The Ugly Truth About Milton Friedman 

These are the ghosts who howl in the background 
every time Milton Friedman offers his "free enterprise" 
homilies on television. 

Momentarily, it will become clear to the reader why 
economics has always been presented as the most arcane 
science. Throughout its history, and particularly since 
John Stuart Mill, British economics strove to eliminate 
from consideration what Alexander Hamilton and his 
American System successors identified as the subject of 
economic science — the transformation of man's power 
over nature through technology. To extirpate this no- 
tion, the British economists have insisted upon two 
premises: that the individual is an unchangeable crea- 
ture of passions, and that the physical universe is a fixed 
"equilibrium" system not susceptible to alteration by 
human intervention. Adam Smith, Hume, Ricardo, and 
their immediate successors were willing to say so 
bluntly, as were the Viennese economists, who claimed 
that economies do not produce wealth but only redis- 
tribute whatever nature chooses to provide. Friedman 
and his colleagues merely rule the issue of the real 
economy out of consideration to begin with. 

The monetarists have thus applied themselves to 
writing justifications for the most repugnant policies, 
beginning with the defense of the opium traffic by 
Smith, Bentham, and Mill, and continuing through to 
Friedman's shameless defense of Hitlerian economics. 

At different periods we find the same set of principles 
and the same set of economists defending apparently 
opposing policies, such as the combination of Fabian 
socialist anticapitalism and Friedmanite anticapitalism 
that has prevailed at the University of Chicago since its 
founding in 1892. This is no question of conflicting 

The Fraud of Free Enterprise 97 

policies or principles. The shock of seeing Milton 
Friedman in his true light should be sufficient to scare 
away the idea that we are dealing with normal questions 
of scientific investigation that can be settled among 
rational people. British System economics is a cult 
whose proper origins go back to the Cult of Apollo at 
Delphi and its agent, Aristotle, the spiritual father of 
British economics. 

The opium base of British economics 

The narcotics traffic is the best reference point for the 
descent into the moral netherworld, for two reasons. 
First, it brings us full circle from East India Company 
employees Adam Smith and the Mills to Milton Fried- 
man, the advocate of Hong Kong as the present-day 
model of "free enterprise." Second, it sets the record 
straight concerning the real content of British System 

The British Empire was founded on the opium trade, 
as Kalimtgis, Goldman, and Steinberg document in 
Dope, Inc. 2 All the talk about Britain's industrial prom- 
inence has no basis whatsoever in fact. Britain's share 
of world industrial production began to decline sharply 
in the mid- 1 840s. By the end of the nineteenth century, 
Britain was importing half again as much as it ex- 
ported — £.450 million in imports against £300 million 
in exports. It made up the difference on dope. In 1890, 
the value of the British opium revenues in China alone 
equaled the entire home trade deficit! Gross revenues 
from the opium traffic averaged two thirds of the total 
volume of exports from Britain between 1840 and 1890. 

9 8 The Ugly Truth About Milton Friedman 

Measured in millions of burnt-out lives, the sum is 

The numbers by themselves do not convey how 
critically dependent the British Empire was on dope. All 
British trade rested, especially before the American Civil 
War, on an opium-based cycle of trade: Britain im- 
ported cotton from American plantations in the South 
(which it financed and ultimately backed during the 
Civil War); turned the cotton into textiles in British 
mills; exported the textiles to India in return for opium, 
which British merchants then sold to China. By 1850, 
cotton textiles accounted for 40 percent of British 
exports. India alone absorbed fully one sixth of these 
cotton exports and one eighth of total British foreign 
sales. India, in turn, depended on opium for 30 percent 
of its own exports, the majority of which went to China. 
The remainder of its exports were distributed among 
different categories of agricultural products, such as 
cotton, sugar, raw silk, and indigo. In British India, 
taxes on the opium trade provided almost 20 percent of 
total government revenues by 1880 — the largest single 
source of government revenue excepting land. The 
proceeds financed the largest standing army in the 
world next to Russia's. 

That the British banking system still controls an 
international dope trade now valued at about $200 
billion (roughly the same proportion of world trade that 
dope occupied under British colonial rule in 1880) has 
been documented at length in Dope, Inc. The lurid facts 
concerning dope's pivotal position in British finances 
throughout the nineteenth century are a simple matter 
of officially released trade statistics. 

The Fraud of Free Enterprise 99 

England did not merely go into the dope trade after the 
American Revolution; the dope trade took over Eng- 
land. Lord Shelburne, the British prime minister who 
concluded peace negotiations with America after Britain 
was beaten at Yorktown, staged a virtual coup d'etat in 
1783 that brought into power the financial and political 
faction that had conducted the opium traffic in its early 
stages since the seventeenth century. 

Shelburne's power bloc in the 1783 coup, which 
brought William Pitt the Younger into power for twenty 
years, rested on the combined aristocratic and religious 
orders on the continent: The Order of St. John of 
Jerusalem and the Society of Jesus grouped around the 
Orleans family, and the East India Company in London, 
reorganized by Francis Baring. 

Shelburne derided as a "Venetian dogeship" (Dis- 
raeli's words) the Hanoverian monarchy and the old 
Glorious Revolution families who had dreadfully bun- 
gled the American Revolution. In the chaos that fol- 
lowed the Yorktown defeat, he employed the best 
contemporary intelligence and dirty-tricks organization 
to take England back from them. "He maintained the 
most extensive private correspondence of any public 
man of his time,*' Benjamin Disraeli wrote. "The earliest 
and most authentic information reached him from all 
courts and quarters of Europe; and it was a common 
phrase, that the minister of the day sent to him often for 
the important information which the cabinet itself could 
not command." 3 Shelburne was chief of the British 
Secret Intelligence Services, and his key operative dur- 
ing the 1780s and 1790s was Jeremy Bentham. 

On the way Shelburne had bought the services of the 

100 The U gl y Truth About Milton Friedman __ 

young Bentham and two Scottish scribblers, David 
Hume and Adam Smith, whom he sent to France for 
Jesuit training and then put on retainer to create a 
"theory" of free trade, which meant in England the 
narcotics trade. The principal objective of the Shelburne 
gang was the elimination of potential rivals among 
industrial republics, and their method was trade warfare 
under the name "free trade." 

David Hume, who spent ten years as Shelburne's 
official representative in France, learned the art of lying 
during a 1734 internship at the Jesuit monastery at La 
Fleche in France, the same monastery where Rene 
Descartes, the founder of so-called enlightenment phi- 
losophy, was educated a century earlier. Hume reported 
to his biographers that his greatest insights into the 
human mind arose from the nature of miracles allegedly 
performed at the Jesuit monastery: They were obviously 
fraudulent, but impossible to prove fraudulent.* From 
this experience came Hume's first book, Treatise on 
Human Understanding (1734), a report to an English- 
speaking audience on Jesuit methods of mind control. 

At the time, the Jesuits represented the purest contin- 
uation of the tradition of the Delphic Cult of Apollo, 
which in turn drew on the "secrets" of the great myth 
fabricators, the priesthood of Babylon. Hume reported 
excitedly that no matter how atrociously absurd, "mir- 
acles" can be sold to the suckers on the P. T. Barnum 
principle: "The many instances of forged miracles, and 
prophecies, and supernatural events, which, in all ages, 
have either been detected by contrary evidence, or which 
detect themselves by their absurdity, prove sufficiently 
the strong propensity of mankind. . . . There is no kind 
of report, which rises so easily, and spreads so quickly, 

The Fraud of Free Enterprise 101 

especially in country places and provincial towns. . . . 
When afterward the [wise and learned] would willingly 
detect the cheat, in order to undeceive the deluded 
multitude, the reason is now past, and the records and 
witnesses, which might clear up the matter, have per- 
ished beyond recovery." 5 If you give enough hokum to 
the yokels, in Paul Samuelson's quip about Milton 
Friedman's method, the sheer mass of their stupidity 
will outweigh any later attempt to prove you wrong. 

Hume set out to prove the axiom true. On his return 
to England, he enlisted Adam Smith, his fellow Profes- 
sor of Moral Sciences at the University of Edinburgh 
and "dearest Friend," 6 in the literary hoax of the 
century: the Ossian epic. 7 Now obscure, Ossian was the 
founding document of what would be called the Nazi 
race mythology, a forged tale of Teutonic greatness in 
the Scottish isles 2,000 years ago. Allegedly collected 
from fragments preserved orally among Scottish tribes- 
men by an obscure Scottish parson, James Macpherson, 
the volume first appeared in English in 1765. The 
Viennese Jesuits had a German edition out three years 
later, thoroughly duping the Goethe circle in Germany, 
and becoming the antecedent for the ugly race fantasies 
of the German romantic movement around Richard 
Wagner. 8 Macpherson was Hume's shill, and Hume and 
Smith created a national scandal by sponsoring Mac- 
pherson in his literary "miracle." 

From his deathbed, Hume had a good laugh at those 
he had duped. In a confession published after his death, 
he wrote, "I think the fate of this production the most 
curious effect of prejudice, where superstition had no 
share, that ever was in the world. A tiresome, insipid 
performance; which, if it had been presented in its real 

102 The Ugly Truth About Milton Friedman 

form, as the work of a contemporary, an obscure 
Highlander, no man could ever have had the patience 
to have once perused, has, by passing for the poetry of 
a royal bard, who flourished fifteen centuries ago, been 
universally read, has been pretty generally admired, and 
translated, in prose and verse, into several languages of 
Europe." 9 He admonished the supposed translator 
Macpherson: "Let him now take off the mask, and 
fairly and openly laugh at the credulity of the public, 
who could believe that long Ese epics had been secretly 
preserved in the Highlands of Scotland, from the age of 
Severus till his time. The imposition is so gross, that he 
may well ask the world how they could ever possibly 
believe him to be in earnest?" 10 

The next great Scottish hoax, for which Ossian was 
mere preparation, was Wealth of Nations, Adam Smith's 
supposed economic masterpiece. 

Hume and Smith's contact point in France was the 
Temple, the Paris headquarters of the Order of St. John 
of Jerusalem, a chivalric secret society that still occupied 
the island of Malta as a sovereign fiefdom. The Order 
owned enormous amounts of property, about one sixth 
of all clerical lands in France, and a large proportion of 
the real estate of Paris. Centered in the Genoese nobil- 
ity, the Order of St. John absorbed the elder, military- 
oriented sons of the Pallavicini and Orleans families, 
while younger sons out of the line of primogeniture 
entered the Society of Jesus, making the two organiza- 
tions branches of the same entity. 

Hume's personal patron while in France, where 
Hume served as British Foreign Minister Shelburne's 
envoy from 1766 to 1767 and unofficial envoy at other 
times, was the Grand Prior of the Order of St. John, the 

The Fraud of Free Enterprise 103 

Prince de Bourbon Conti. Prince Conti succeeded as 
Grand Prior the Due d'Orleans, who later financed the 
mobs that burned the Bastille." Conti's personal librar- 
ian, the Abbe Blavet, popularized Hume's writings in 
France and wrote the first French translation of Wealth 
of Nations. 

The Scottish pipeline into the Orleans family and the 
French branch of the Order of St. John had been estab- 
lished at the turn of the eighteenth century, when the 
remnants of the exiled Scottish Jacobites — the faction 
that opposed the 1688 "Glorious Revolution" against 
the Stuarts — settled in France. Their leading political 
spokesman in early eighteenth-century England, Lord 
Bolingbroke, fled to France after he was accused of 
supporting the 1715 Highlands uprising, and spent the 
remainder of his life under Orleans sponsorship. Shel- 
burne and his Jacobite father-in-law John Carteret, 
continued Bolingbroke's efforts to take England back, 
concluding in the Shelburne coup of December 1783. 
As Benjamin Disraeli wrote a century later: 

"Lord Shelburne adopted from the first the Boling- 
broke system; a real royalty, in lieu of the chief magis- 
try; a permanent alliance with France [with the Orleans 
family] instead of the Whig scheme of viewing in that 
power the natural enemy of England; and above all, a 
plan of commercial freedom, the germ of which may be 
found in the long-maligned negotiations of Utrecht, but 
which, in the instance of Lord Shelburne, were soon in 
time matured by all the economical science of 
Europe." 12 

The "economical science" Shelburne employed did not 
start with Smith and Bentham, who worked on the 

104 The Ugly Truth About Milton Friedman 

Shelburne payroll, but with the Order of St. John's 
group of pet intellectuals, the physiocrats. Sorting out 
physiocratic writings is a thankless task, because the 
French writers combined the most extreme zero-growth, 
anti-industrial attitude with obligatory references to 
concepts developed by the French humanist economists. 
We do not hear of Jacques Rueff s forbears Forbonnais, 
Trudaine, and others among Benjamin Franklin's intel- 
lectual collaborators in France, only of Quesnay, Mira- 
beau, and the other physiocrats, due to the pernicious 
fraud of Hume and Smith, and Karl Marx's credulous 
perpetuation of that fraud. 

Strictly speaking, the physiocrats were the spokesmen 
for Chinese "oriental despotism" in economics, the 
same viewpoint that now lauds agrarian backwardness 
in Maoist China. They rewrote Chinese zero-growth 
economics into European terminology, based on Chi- 
nese texts brought back to Europe by the Jesuits' 
mission to China. The famous author of the Tableau 
Economique, Francois Quesnay, who served as physician 
to Madame Pompadour, began his writing career with 
a study of the Chinese model, Despotism in China. Even 
Franklin's friend Anne Robert Turgot, whose fall as 
France's finance minister made the 1789 French Revo- 
lution inevitable, gobbled up the sinophile currents that 
swept France. His major economic treatise, Reflections 
on the Formation and the Distribution of Wealth, was 
written in 1776 for two Chinese who had been brought 
to France by the Jesuits, and who were to return to 
Canton to correspond with the Jesuits on "Chinese 
literature and science." 13 Voltaire, Rousseau, Diderot, 
and the entire Enlightenment mafia became rabid sino- 
philes. According to a French historian, "China, to 

The Fraud of Free Enterprise 105 

judge from the number of citations, seemed more in 
favor than England itself/* 14 

The physiocrats drew three principal notions from 
the work of Confucius, Mencius, and the Chinese sages: 
first, that the universe was a fixed entity that underwent 
yin-yang cycles of expansion and contraction but could 
not develop; second, that laissez faire, or free enterprise, 
among the prisoners of this fixed universe would sort 
out economic matters by itself; and finally, that land 
was the source of all wealth by gift of nature. Man can 
distribute this value, but not create it. 

Smith made these alien notions the core of his Wealth 
of Nations. In fact, he did not bother to rewrite some of 
the physiocratic treatises he had obtained during a ten- 
year sojourn in France prior to the 1776 publication of 
his book. Entire sections of Wealth of Nations were 
plagiarized from Turgot's Reflections, as the French 
economist and chemist Du Pont de Nemours noted 
bitterly some years later. 15 

Smith could not bring himself to insist that all value 
came from nature, which the Austrian School econo- 
mists were to do later, but argued that a special sort of 
value comes from nature, which human effort could 
never match: 

"No equal capital puts into motion a greater quantity 
of productive labor than that of the farmer. Not only 
his labouring servants, but his labouring cattle, are 
productive labourers. In agriculture too nature labours 
along with man; and though her labour costs no ex- 
pense, its produce has its value as well as that of the most 
expensive workmen. . . . The labourers and labour- 
ing cattle, therefore, employed in agriculture, not only 
occasion, like the workmen in manufactures, the repro- 

106 The Ugly Truth About Milton Friedman 

duction of a value equal to their own consumption, or 
to the capital which employs them, together with its 
owner's profits; but of a much greater value. . . . No 
equal quantity of productive labour employed in man- 
ufactures can ever occasion so great a reproduction. In 
them nature does nothing; man does all; and the 
reproduction must always be in proportion to the 
strength of the agents that occasion it." 16 

Alexander Hamilton devastated this view in his 1791 
Report to Congress on the Subject of Manufactures: 

"But while the exclusive productiveness of agricul- 
tural labor has been . . . denied and refuted, the superi- 
ority of its productiveness has been conceded without 
hesitation. As this concession involves a point of consid- 
erable magnitude, in relation to maxims of public 
administration, the grounds on which it rests are worthy 
of a distinct and particular examination. One of the 
arguments made use of in support of the idea may be 
pronounced both quaint and superficial. It amounts to 
this— That in the productions of the soil, nature coop- 
erates with man; and that the effect of their joint labor 
must be greater than that of the labor of man alone. 
This, however, is far from being a necessary inference. 
It is very conceiveable, that the labor of man alone laid 
out upon a work, requiring great skill and art to bring 
it to perfection, may be more productive, in value, than 
the labor of nature and man combined, when directed 
toward more simple operations and objects; And when 
it is recollected to what an extent the Agency of nature, 
in the application of mechanical powers, is made auxil- 
iary of the prosecution of manufactures, the suggestion, 
which has been noticed, loses even the appearance of 
plausibility. . . . Another, and that which seems to be 

The Fraud of Free Enterprise 107 

the principal argument offered for the superior produc- 
tiveness of Agricultural labor, turns upon the allegation, 
that labor employed in manufactures yields nothing 
equivalent to the rent of land; or to the net surplus, as it 
is called, which accrues to the proprietor of the soil. But 
this distinction, important as it has been deemed, ap- 
pears rather verbal than substantial " X1 

In his first major work, the 1759 Theory of Moral 
Sentiments, Smith set forth the principle of "moral 
indifferentism" that underlies "free enterprise" in a way 
that left nothing for Milton Friedman to add: 

"The administration of the great system of the uni- 
verse ... the care of the universal happiness of all 
rational and sensible beings, is the business of God and 
not of man. To man is allotted a much humbler 
department, but one much more suitable to the weak- 
ness of his powers, and to the narrowness of his 
comprehension; the care of his own happiness, of that 
of his family, his friends, his country. . . . But though 
we are . . . endowed with a very strong desire of those 
ends, it has been intrusted to the slow and uncertain 
determinations of our reason to find out the proper 
means of bringing them about. Nature has directed us 
to the greater part of these by original and immediate 
instincts. Hunger, thirst, the passion which unites the 
two sexes, the love of pleasure, and the dread of pain, 
prompt us to apply those means for their own sakes, 
and without any consideration of their tendency to 
those beneficent ends which the great Director of nature 
intended to produce by them." 18 

In the Theory, Smith tried to impose a "self-regulat- 
ing" system of moral affairs on his Benthamite creatures 
of passion by arguing that since one of these passions is 

108 The Ugly Truth About Milton Friedman 

the desire to be admired by others, everyone will do the 
things that cause others to admire them, in a sort of 
feedback mechanism. Seventeen years later he trans- 
ferred this mechanism to economics under the famous 
rubric, the "Invisible Hand." 

To Shelburne, Smith's economic theory was a minor 
fringe benefit of the Jesuit connection to China; of 
overriding importance was the link to the opium trade. 
That was a matter of survival. Shelburne devised two 
grand, interlocking strategies for the British Empire: 
the "peaceful" takeover of the United States through 
the weapon of "free trade," and the launching of the 
opium trade on a massive scale. The first was the 
content of declared and undeclared war between Britain 
and the United States until the United States slowly 
succumbed in the years before World War I. Before that 
happened, the second provided the sustenance of the 
City of London and allied European financiers. 

Shelburne's reorganization of the East India Com- 
pany into a looting organization that rivaled Hitler's 
SS, and the subversive "free trade" flank against the 
United States, both emerged as policy proposals in 
Wealth of Nations in 1776. Smith blasted the East India 
Company's practice of "ordering a peasant to plough 
up a rich field of poppies and sow it with rice or some 
other grain," in order to maintain high opium prices in 
the existing restricted markets. Smith argued instead 
that the opium market had to be extended on a large 
scale. The East India Company itself had been doing 
business in dope since 1717, but faced considerable 
restrictions on the expansion of the trade, notably the 
Chinese emperor's ban on opium imports. 

The Fraud of Free Enterprise 109 

Since the establishment of the first Jesuit mission in 
Peking in 1601 (coinci dentally the year of the East India 
Company's founding), the Jesuit missions held the key 
to Asian trade. The Jesuits reached the orient after the 
first Portuguese trade and military inroads at the end of 
the sixteenth century, and achieved positions of im- 
mense influence in China and in India, then under the 
Mogul empire, when the first large-scale cultivation of 
opium is recorded officially. After the 1644 overthrow 
of the Ming Dynasty by the Manchu, the Jesuits 
persuaded the new Chinese court to eliminate all West- 
ern contact but theirs. When Dutch traders drove the 
Portuguese out of Asian trade, their negotiating part- 
ners for matters of Chinese trade were the Jesuits. The 
Portuguese, and later the Dutch, took over the centu- 
ries-old dope-trading routes once plied by Arab and 
Indian traders, including opium trade between Canton, 
China's key port city, and Portuguese-controlled Ma- 
cao. The Dutch later negotiated an opium monopoly 
for the entire northern part of the Indian subcontinent 
with the Jesuit-influenced Mogul court. The monopoly 
included Bengal, Bihar, Orissa, and Benares, and per- 
mitted the Dutch traders to force-draft Indian peasants 
to produce opium in exchange for taxes paid to the 
Mogul court. In turn, the Dutch used opium as a 
medium of exchange for spices in the East Indies; the 
great Chinese market that sustained the British opium 
trade was still closed off to them. 

By 1659, the opium trade had become second only to 
the spice trade. A century later, the Dutch were shipping 
more than 100 tons of opium per year to Indonesia. 
Apart from the immense financial benefits of the traffic, 
the Dutch found opium "a useful means for breaking 

110 The Ugly Truth About Milton Friedman 

the moral resistance of Indonesians who opposed the 
introduction of their semi servile but increasingly prof- 
itable plantation system. They deliberately spread the 
drug habit from the ports, where Arab traders used 
opium, to the countryside." 19 

Britain's East India Company muscled into the opium 
trade only after the British military victories in India in 
1757, which put Bengal under British rule. However, 
the British administrations in Bengal of Robert Clive 
and later of Warren Hastings ran the opium monopoly 
on behalf of East India Company officials, who lined 
their pockets on the side. The Indian fortunes of individ- 
ual "company servants" became immense, and among 
other things provided the biggest slush fund in eight- 
eenth-century politics short of the rotten boroughs and 
George the Ill's personal patronage. 

The East India Company, which had paid the costs of 
the military expeditions without seeing any of the profit 
from the resulting opium monopoly, was on the edge of 
bankruptcy from the late 1760s until its reorganization 
under Shelburne in 1784. The company was restructured 
along the lines Adam Smith proposed in a paper 
prepared at Shelburne's instigation for an East India 
Company "Commission of Investigation" in 1772. Re- 
peatedly the East India Company had to apply for a 
parliamentary bailout, and the collapse of its shares 
triggered the 1769 financial crisis. 

Throughout the Revolutionary War period, the East 
India Company was not an agency of the British 
monarchy but a leech on it, benefiting the financial 
faction that ultimately consolidated around Shelburne. 
The expenses of the Revolutionary War brought Eng- 
land to the poorhouse door by 1783, the year of the 

The Fraud of Free Enterprise 111 

signing of the Treaty of Paris with Franklin. Britain's 
national debt had swollen to the then-stupendous figure 
of £240 million, and debt service consumed more than 
half of all government tax revenues. Worse, Britain lost 
most of the European market in staple items such as 
linens, textiles, and ironware to France, which also 
threatened to take over the Atlantic trade with the new 
United States under a project devised by Hamilton and 
Lafayette. Loss of control over trade financing would 
have toppled the pillar on which the entire British 
national debt rested. Shelburne, standing behind the 
ministry of the twenty-two-year-old William Pitt, set 
out to break the French, expand the opium traffic, and 
subvert the United States — all in the name of "free 

First, Shelburne struck an alliance with the East India 
Company faction around Laurence Sullivan, whose son 
had subcontracted for the private opium monopoly in 
Bengal; Francis Baring, the Anglo-Dutch banker prom- 
inent in the Atlantic trade; and the head of the mon- 
archy's patronage machine, John Robinson. 20 The com- 
bined slush funds of the monarchy and the East India 
private fortunes were sufficient to outweigh the impres- 
sive patronage powers of the Glorious Revolution's 
landed families. In mid-December 1783, Shelburne 
made George III an offer he couldn't refuse, and the 
king appointed William Pitt First Treasury Lord. Shel- 
burne himself was too hated — his nickname was "the 
Jesuit of Berkeley Square" — to take office after his brief 
term as prime minister two years earlier. Slush fund 
manager John Robinson drew up a list of every member 
of the British Parliament by political affiliation and 
purchase price, with a bottom line figure of slightly 

112 The Ugly Truth About Milton Friedman 

under £200,000 for the lot. East India Company offi- 
cers marshaled by Laurence Sullivan paid up, and 
Shelburne bought the 1784 election for William Pitt. 

Pitt's first major piece of legislation was the 1784 East 
India bill, which made the East India Company in effect 
a department of the British government, under a Board 
of Control. Scottish mafioso Henry Dundas, Pitt's 
secretary of state, directed the Board of Control, and in 
1787 wrote a master plan to extend the opium traffic 
into China. Dundas, an early patron of Adam Smith, 
was the uncle of Robert Dundas, the infamous Lord 
Advocate of Scotland, whose "clearances" of the Scot- 
tish Highland population inspired the phrase "Sheep 
eat men." 21 

Blitzkrieg against France 

Merely surviving the 1780s, however, required the first 
major exercise in Smithian trade warfare, against 
France, which had experienced a stupendous growth 
spurt under the administration of Louis XV's great 
Colbertian administrator Daniel-Charles Trudaine. Al- 
though hampered by poor internal communications, 
French industrial production surged to the point where, 
by the end of the American Revolution, France's steel 
output was almost twice the British level, and French 
traders dominated the Iberian, Italian, and German 
markets. But France's great weaknesses were poor 
transport — compared to England's natural maritime 
advantage — and a financial system dominated by Ge- 
nevan and Dutch financiers, whose representative was 
Jacques Necker, the finance minister at the time of the 

The Fraud of Free Ente rprise 113 

Louis XV's death in 1775 weakened the hold of the 
Colbertistes and strengthened the hand of the Orleans 
group, the ally of the Geneva bankers. Pressed by 
Talleyrand, who was starting his career at the French 
treasury, and the younger Mirabeau, son of the physi- 
ocrat economist and a picaresque figure during the 
Revolution, France fell for Shelburne's ruse in 1786. 
The Pitt government offered France a "free trade" 
treaty, opening France up to British textiles in return 
for promised British markets for French wines, and the 
further promise of a system of trade treaties that would 
enhance the French position in German and Russian 
markets, a slant devised by Mirabeau. Immediately after 
France signed the treaty, British exporters dumped 
masses of textile products in the French market, pro- 
voking economic chaos and mass unemployment. Even 
though French textiles were at the time produced at 
higher labor productivity and lower cost, British control 
over trade financing and merchant shipping allowed 
British manufacturers to temporarily undercut French 
prices. At the same time, Pitt lowered tariffs on wine 
imports from Portugal to below the level that the 
French treaty had set for French wine imports, enabling 
cheap Portuguese imports to take the English market 
away from French vineyards. France's internal finances 
collapsed, and Genevan financiers made Necker's ap- 
pointment as finance minister a condition for a rollover 
of the French national debt. 

Necker, in turn, demanded that Louis XVI convene 
the Estates General, the assembly of the French nation, 
in order to raise the additional taxes required to meet 
French debt service to Geneva. Mobs paid and armed 
by the Due d'Orleans, the former Grand Prior of the 

114 The Ugly Truth About Milton Friedman 

Knights of St. John who had hosted Smith and Hume 
in Paris through the 1760s and 1770s, constituted the 
force that stormed the Bastille, and threw France into 
the chaos of the Jacobin terror. 

Shelburne exerted his influence on the collapse of 
France through his Secret Intelligence Service operative 
Jeremy Bentham. Bentham, who adapted Smith's bestial 
theory of "moral sentiments" into a would-be "moral 
calculus," had the opportunity to put his views into 
practice from 1789 onward. 

Bentham had moved onto the Shelburne payroll and 
into Shelburne's house in 1782 as the "Jesuit's" personal 
secretary and librarian. Through Shelburne, Bentham 
met Mirabeau — the inside man of the 1786 trade 
treaty — who arranged the translation of Bentham's lev- 
eler ravings into French almost before the ink had 
dried. 22 By 1788, translation was no longer necessary — 
Bentham had begun writing his tracts in French. 23 
Bentham rushed copy into terrorist Jean-Paul Marat's 
"revolutionary" newspaper, VAmidu Peuple, by special 
boat to France. Marat, the mob leader who personally 
insisted upon the murder by guillotine of every leading 
French scientist, including the chemist Lavoisier, had 
spent ten years prior to the Revolution under Shel- 
burne's personal tutelage. 24 

The Jacobin mob represented the ideal type of Ben- 
tham man. A "philosophical radical," Bentham threw 
out Smith's idea that moral society operated under 
some sort of internal controls. "Nature has placed 
mankind under the governance of two sovereign mas- 
ters, pleasure and pain," Bentham wrote; "it is for them 
alone to point out what we ought to do, as well as to 
determine what we should do." 25 Bentham insisted that 

The Fraud of Free Enterprise 115 

there could be no restrictions to human bestiality. His 
most notorious exercise in favor of the principle of 
utility, which says roughly, "If it feels good, do it," was 
an essay in defense of pederasty. 26 

Although he acknowledged Adam Smith's authority 
in economic matters, Bentham's first published tract on 
economics was his 1787 Defence of Usury, which lam- 
basted Smith's cautious endorsement of usury laws in 
Wealth of Nations. Usury laws, Bentham said, violate 
Adam Smith's own precept that the individual is the 
best judge of his own interest, and if individuals want to 
borrow at any rate they choose, that is their business. 
After reading the pamphlet, Adam Smith told Bentham: 
"The work is one of a superior man. He has given me 
some hard knocks, but in so handsome a manner I 
cannot complain." 27 Bentham immediately celebrated 
the outbreak of the Revolution by organizing a cheering 
section for Marat called the English Jacobins. 

Until 1794, when Lazare Carnot and his allies finally 
drove the Jacobins from power, France was in ruins. 
Shelburne and Bentham had bought Britain time to lick 
its wounds from the Revolutionary War and prepare 
the expansion in the Far East. In the years from 1786 to 
1800, Britain grasped the control over international 
trade that it retained through the end of World War I. 
Actual British exports grew only marginally. However, 
British reexports of goods produced in other countries 
and sold by British middlemen grew exponentially. If 
anything, total world trade volume declined during the 
period due to the destabilization of France. However, 
Britain's share of it, particularly the German, Italian, 
and Russian markets seized from France, more than 

116 The Ugly Truth About Milton Friedman 

The subversion of America 

If it were not for the passage of the Constitution of the 
United States in 1789, Shelburne's more ambitious proj- 
ect — the financial reconquest of the United States — 
would have succeeded. Smith urged the colonies, in his 
Wealth of Nations, not to enter into manufacturing, and 
above all not to keep British goods out: 

"It has been the principal cause of the rapid progress 
of our American colonies towards wealth and greatness, 
that almost their whole capitals have hitherto been 
employed in agriculture. . . . Were the Americans either 
by combination or by any other sort of violence, to stop 
the importation of European manufactures and by this 
giving a monopoly to such of their own countrymen as 
could manufacture the like goods, divert any consider- 
able part of the capital into this employment, they 
would retard instead of accelerating the further increase 
in the value of their annual produce, and would obstruct 
instead of promoting the progress of their country 
toward real wealth and greatness. This would be still 
more the case, were they to attempt in the same manner 
to monopolize to themselves their whole exportation 
trade." 28 

This position, adopted by David Hume's admirer 
Thomas Jefferson, is fraudulent on Smith's part. No- 
where in Wealth of Nations does he remonstrate against 
British prohibitions against American manufactures, 
which already threatened to outstrip British productiv- 
ity a quarter-century before the American Revolution. 
Shelburne wanted to keep the United States an agrarian 
protectorate. The major policy objective toward Amer- 

The Fraud of Free Enterprise 117 

ica that Smith enunciated was to compel Americans to 
pay the British national debt. The entire concluding 
chapter of Wealth of Nations is a tabulation of the taxes 
that Smith suggested could be imposed on American 
produce, from timber to tobacco. The bottom line was 
an annual take of £.15,900,000 — the total debt service 
owed on Britain's national debt at the time Smith wrote. 

Smith had attempted, as adviser to Chancellor of the 
Exchequer Lord Townsend, to push such taxes through, 
and therefore had a direct role in forcing the American 
colonists to fight for their independence. The conclud- 
ing paragraph of Smith's book complains that past 
British governments had failed to realize sufficient 
revenues from the colonies even to compensate for 
military expenditures there: 

"The rulers of Great Britain have, for more than a 
century past, amused the people with the imagination 
that they possessed a great empire on the west side of 
the Atlantic. It has hitherto been, not an empire, but the 
project of an empire; not a gold mine, but the project of 
a gold mine; a project which has cost, which continues 
to cost, and which, if pursued in the same way as it has 
been hitherto, is likely to cost immense expense, without 
being likely to bring any profit." If Britain cannot loot 
the colonies, it should permit them to separate, "and 
endeavor to accommodate her future views and designs 
to the real mediocrity of her circumstances." 29 

In fact, two British factions — for different reasons — 
encouraged the American revolutionaries in open defi- 
ance of the Tory cabinet of Lord North. The old 
Glorious Revolution Whigs, under Lord Rockingham, 
found themselves in a bitter patronage contest with the 
monarchy, and cheered anyone who seemed likely to 

118 The Ugly Truth About Milton Friedman 

embarrass George III or break his power. Shelburne, 
under the slogan "We prefer trade to dominion," also 
opened contacts with the revolutionary leaders, believ- 
ing that trade warfare would be more effective than 
military warfare. Great Britain, Smith had argued in 
Wealth of Nations, "would not only be immediately 
freed from the whole annual expense of the peace 
establishment of the Colonies, but might settle with 
them such a treaty of commerce as would effectually 
secure to her a free trade." 30 

Smith's encomium had been the subject of a series of 
velvet-gloved offers from Shelburne, starting during the 
1767 government of William Pitt's father, Lord 
Chatham. Shelburne faced adamant demands from the 
Americans for the westward expansion of the settle- 
ments, prohibited except for areas of Georgia and 
Florida in the south, and Nova Scotia in the north. 
Shelburne himself, at the head of the Board of Trade at 
age twenty-six, had written the prohibitions against 
western colonization. The intent of the restrictions, 
according to historian Vincent Harlow, was to subvert 
the development of colonial manufactures, ensure that 
future colonization did not interfere with the British fur 
trade, and, above all, to prevent the expansion of the 
New England colonies' republican form of govern- 
ment. 31 As a concession, Shelburne offered in 1767 to 
permit three new settlements along the Illinois and 
lower Mississippi rivers, all the while continuing with 
his plan to develop the St. Lawrence River and Great 
Lakes as British continental waterways for British mar- 
kets. He proposed to finance the scheme by permitting 
large land speculators to purchase immense tracts of 
land, in imitation of the plan his great-grandfather, 

The Fraud of Free Enterprise 119 

economist William Petty, had devised a century earlier 
for the Herditary Revenues of Ireland. 

At the 1782 peace negotiations in Paris, Shelburne 
offered the Americans "self-governing" dominion sta- 
tus with commercial union — which both the victorious 
revolutionaries and British West Indian interests, who 
stood to lose by the arrangement, rejected, bringing 
down Shelburne's short-lived ministry. 

The content of Shelburne's offer became evident in 
the struggle for control of Atlantic shipping that fol- 
lowed the Treaty of Paris. Britain's Navigation Acts 
gave British ships a monopoly over Atlantic trade until 
the Revolution. Even afterward, Britain continued to 
dominate not only the Atlantic but also American 
seacoast trade, while American ships were prohibited 
from trading in British ports. Under the Articles of 
Confederation, the federal government, such as it was, 
had no authority to retaliate against this open form of 
trade warfare. Individual states, especially Rhode Island 
and the New Englanders, made special deals with 
Britain to the disadvantage of the American nation, so 
that no common front could be formed. As soon as the 
Constitution was ratified in 1789, one of the first actions 
of the new Washington administration was to prohibit 
British ships on the American seacoast routes. American 
superiority in shipbuilding technology asserted itself, 
and by the end of the century, 90 percent of Atlantic 
shipping was under American control. 

'Tree trade," the contemporary equivalent of "free 
enterprise," was a lie concocted by Shelburne's hired 
scribblers Hume, Smith, and Bentham. Shelburne's first 
efforts at ruining the United States with this lie did not 
succeed. But his persistent efforts to infiltrate American 

120 The Ugly Truth About Milton Friedman __ 

political circles paid off. Shelburne maintained corre- 
spondence with Thomas Jefferson's political lieutenant, 
Arthur Lee, for some years after the Revolution. Jeffer- 
son himself, who supported both the British free trade 
and anti-industry doctrines throughout his life, main- 
tained a friendship and correspondence until his death 
with Adam Smith's successor at the University of 
Edinburgh, Dugald Stewart, the man who trained Brit- 
ain's Opium Wars prime minister, Lord Palmerston. 
Jefferson's Vice-President, Aaron Burr, asked Jeremy 
Bentham to write the constitution for his projected 
break-away empire in the Louisiana territories; when 
Aaron Burr went to England after his trial for treason, 
he lived with Bentham. 32 

Starting in the second decade of the nineteenth cen- 
tury, Britain's most important tool for cracking open 
the United States was the opium trade. The British 
banking families, including the Barings, who had inter- 
married with the Philadelphia Binghams, cut some 
Boston merchants in on the lucrative China traffic. John 
Jacob Astor was trading opium as early as 1816, by 
special arrangement with the East India Company; 
Aaron Burr was Astor's personal attorney, and Astor 
provided the funds for Burr's escape to England after 
Burr murdered Alexander Hamilton in 1801. 33 

The Boston "Brahmin" families, the backbone of the 
"Cobden Clubs" free trade movement during the nine- 
teenth century, made it into the mainstream of the 
opium traffic. William Hathaway Forbes, of the Boston 
family, achieved sufficient prominence to join the 
founding board of directors of the opium trade's central 
bank, the Hongkong and Shanghai Bank, two years 
after its founding. The Cabots, Lodges, Forbes, Cun- 

The Fraud of Free Enterprise 121 

ninghams, and other leading Boston merchant families 
made their initial fortunes through Russell and Co., 
whose principal lines of business were West African 
slaves and opium to China. 34 

Shelburne and his successors bought themselves an 
American clique, through the resources of the East 
India Company. These were the bitterest enemies of the 
Lincoln faction in American politics and of the Lincoln 
economists, Mathew and Henry Carey. One of Carey's 
associates, economist Jacob Patton, wrote in 1887: 

"By far the most persistent and the most powerful 
antagonist of our mechanical industries is the famous 
'Cobden Club.' Ever since its formation it has been 
popular with the ruling classes in England, counting 
among its members a year or two since twelve cabinet 
ministers out of fourteen, and all the great Secretaries 
of State, from the Prime Ministers down to those of the 
colonies, and also other prominent men in Church and 
State, besides manufacturers and owners of the soil." 35 

Patton continued: "England was an oppressor of the 
trade and mechanical industries of the American colo- 
nists, and only encouraged them in producing the raw 
material. . . . Lord Brougham in his place in Parliament 
after the Treaty of Ghent was signed, announced that 
'it was well worth while to incur a loss upon the first 
exportation of goods in order by the glut to stifle in the 
cradle those rising manufactures in the United States 
which the war had forced into existence, contrary to the 
nature of things ... a Parliamentary commission in 
1854 spoke of the losses their manufacturers sustained 
in foreign markets.' Thus 'to overwhelm all foreign 
competition' and then 'step in for the whole trade when 
prices revive.' " 36 

122 The Ugly Truth About Milton Friedman 

"Before the civil war," Pattern reported, "one of the 
largest establishments in England for rolling iron had 
an agency in the City of Boston. The duties in railroad 
iron at that time — under the tariff of 1 846 — were quite 
low, and our railways were supplied partly from domes- 
tic mills and partly from those in England. The latter 
firms systematically kept lowering their prices. Mean- 
while the American mills, the weaker first, were com- 
pelled to shut down . . . and when the last one suc- 
cumbed, the news was sent to England, and with it also 
the statement 'that there was no longer any danger from 
American competition.' The reply immediately came 
back, 'advance prices,' and in less than a year the price 
of English rails to American consumers had increased 
about 100 percent." 37 

The new East India Company 

Free trade was the official doctrine of the East India 
Company, but for reasons other than the obvious. 
Opening the Chinese market required seventy years of 
subversion and two Opium Wars. 

In 1787, when Secretary of State Henry Dundas 
circulated his blueprint for the taking of China, Britain 
was neither prepared nor able to use the military 
methods of 1840 to impose the opium traffic on China 
against the edicts of prohibition of the Chinese emper- 
ors. As a crown corporation, the East India Company 
could not do opium business in its own name. It 
required a set of "cut-outs," or intermediaries, who 
would conduct the exports of opium from India to 
China on the company's covert behalf. The penny-ante 

The Fraud of Free Enterprise 123 

efforts of the pre-Shelburne East India Company had 
no part in the bigger scheme of things, as Adam Smith 
wrote in Wealth of Nations: 

"The servants of the company have upon several oc- 
casions attempted to establish in their own favour the 
monopoly of some of the most important branches, not 
only of the foreign, but of the inland trade of the 
country. ... In the course of a century or two, the 
policy of the English company would in this manner 
have probably proved as completely destructive as that 
of the Dutch. Nothing, however, can be more directly 
contrary to the real interest of those companies consid- 
ered as the sovereigns of the countries which they have 
conquered. ... It is in [the sovereign's] interest, there- 
fore, to increase as much as possible that annual pro- 
duce. But if this is the interest of every sovereign, it is 
peculiarly so of one whose revenue, like that of the 
sovereign of Bengal, arises chiefly from a land rent. 
That rent must necessarily be in proportion to the 
quantity and value of the produce, and both one and 
the other must depend upon the extent of the market." 38 

With the connivance of Dundas, Francis Baring, the 
banker who remained Shelburne's closest political ally, 
financed a network of "agency houses," which by the 
1790s controlled the Indian interior trade, the Canton 
trade, and most government contracts. 39 Jardine Mathe- 
son, the king of the nineteenth-century opium trade was 
already in operation; Jardine still manages heroin traffic 
out of Milton Friedman's Hong Kong today. 40 

"Thus the chain of commodity-exchanges, linking 
England, India, Southeast Asia and China, was devel- 
oped and diversified through a strange marriage of 
convenience between a monopoly corporation [the East 

124 The Ugly Truth About Milton Friedman 

India Company] and an elaborate and exclusive form of 
private enterprise," wrote historian Harlow. 41 

Gradually, the functions of the East India Company 
diverged into the official crown administration of India, 
and the network of private dope traders that ultimately 
formed the Hongkong and Shanghai Bank in 1864. 
British traders shipped opium to China in open viola- 
tion of imperial prohibition, as a "free enterprise" ac- 
tivity in which official British hands were clean. But 
when China attempted to crack down on the out-of- 
control dope traffic in 1840, Prime Minister Lord 
Palmerston, who had received the wisdom of Adam 
Smith at Edinburgh University from the hands of 
Dugald Stewart, declared the first Opium War against 

By the 1830s, opium was the largest commodity in 
international trade. 42 

From dope to Malthus 

The East India College at Haileyburg, the training 
center for Company officials and Indian civil servants, 
became the clearinghouse for the next generation of 
British economists, including James Mill, his son John 
Stuart Mill, David Ricardo, Parson Thomas Malthus, 
and aging Jeremy Bentham, their intellectual leader 
until his death in 1821. 

Malthus, the inventor of body-count economics, is 
most important; his theory of population was adapted 
by Ricardo into a generalized theory of political econ- 
omy. As a young Oxford divinity student waiting for 
appointment to a Church of England sinecure, Malthus 

The Fraud of Free Enterprise 125 

was called to public life by William Pitt. The first great 
financial crisis of the war with Napoleon which had 
broken out in 1796, had ruined British finances, com- 
pelling the Bank of England to suspend for fifteen years 
the convertibility of the pound sterling into gold. By 
1800, social conditions had deterioriated to the point 
that expenditures under the Poor Law, a rudimentary 
form of welfare, exceeded <£2 million per year, a 
staggering sum for the times. Pitt encouraged the 1798 
publication of Malthus's Essay on Population, which 
was understood at the time as a frank apology for the 
extermination of "useless eaters." John Maynard 
Keynes, in his biographical sketch of Malthus, reports: 

"In dropping his new Poor Bill, Pitt, who in 1796 
thought that a man had 'enriched his country' by 
producing a number of children, even if the whole 
family were paupers, had stated in the House of Com- 
mons that he did so in deference to the objections of 
'those whose opinions he was bound to respect,' mean- 
ing Bentham and Malthus." 43 

Poor relief was eliminated. "Malthus's Essay is a 
work of youthful genius," Keynes commented. 

Malthus and Bentham's argument was, of course, 
that population must grow faster than the increase in 
the food supply, and therefore will be restrained by 
famine, pestilence, and war. A more obvious lie has not 
been told by any economist since. In a country like the 
United States, where 2.5 percent of the population 
produces half again as much food as is needed for the 
entire population, it is outrageous to speak of "fixed 
natural resources." That has not prevented the Club of 
Rome, the World Bank, and other professed adherents 
of Malthus from perpetuating the lie. 

126 The Ugly Truth About Milton Friedman 

Proposing to eliminate large portions of the world's 
population through war, pestilence, and famine quali- 
fied Parson Malthus for the Chair of History and 
Political Economy at the East India Company's Hai- 
leyburg training center. He sent a generation of Malthu- 
sians into controlling positions of the narcotics traffic 
in Asia. Malthus, in his 1819 Principles of Political 
Economy, elaborated his population program into a 
generalized zero-growth approach to industrial econ- 

He began by admitting that his murderous popula- 
tion theory was, after all, a hoax: "The millions in 
capital which have been expended in drainings" of 
agricultural land "and in the roads and canals for the 
conveyance of agricultural products, have tended to 
raise rather than lower profits; and millions and millions 
more may yet be employed with the same advantageous 
effect.*' 44 In other words, capital investment lowered the 
price of grain relative to the virtual depression period in 
which Malthus wrote his original Essay on Population. 
As a result, the cost of subsistence wages fell, and 
industrial profits rose. This, of course, was the opposite 
of what Malthus and David Ricardo had predicted 
would happen. 

The fact that Malthus so casually qualified his popu- 
lation theory merely draws attention to the more fun- 
damental issue: In the tradition of David Hume, he was 
a liar, who spun out "economic theories" according to 
Hume's principle of the "undetectable lie." As Keynes 
noted, Hume was Malthus's fairy godmother. 45 

Speaking for the East India Company's looting pro- 
gram in Asia, Malthus was committed to the defense of 
zero growth. When the British experience of 1800 to 

The Fraud of Free Enterprise 127 

1820 failed to corroborate his earlier prediction of mass 
starvation, Malthus revised his population principle for 
application to industry in general. So what if profits 
rose, Malthus asked. Manufacturers would merely have 
to reinvest them, and as they did, the competition of 
many capitals in the same industrial fields would drive 
profits down just as surely as would a rise in wages due 
to more costly, scarcer grain. 46 For that reason, it was 
useless to attempt to import cheap grain to meet the 
subsistence requirements of the Lancashire textile work- 
ers who spun cotton for the Indian market at pennies 
per day: 

"Our present body of manufacturers, when they call 
for imported corn, think chiefly of the additional de- 
mand for their goods occasioned by the increased 
imports [which would supposedly cheapen the cost of 
wages], and seem quite to forget the prodigious increase 
of supply which must be occasioned by the competition 
of so many more workmen and capitals in the same line 
of business." 47 

No matter what you do, Malthus expounded in his 
Principles, profits will fall, economic growth will cease, 
and society will settle into a permanent equilibrium, 
enforced by war, famine, and pestilence. 

Malthus was joined at Haileyburg in 1819 by James 
Mill, a protege of Jeremy Bentham, who assumed the 
post of Assistant Examiner of India Correspondence, 
that is, second-in-command of East India Company 
intelligence. Mill had spent the past dozen years under 
company contract writing the standard text for East 
India Company operations, A History of British India. 
The History called for the end of restrictions against 

128 The Ugly Truth About Milton Friedman 

British textile exports to India, and the expansion of 
India's opium exports, both of which occurred within a 
decade of the book's release. 

Two central themes pervaded Mill's book. First, fol- 
lowing Malthus, Mill distorted Indian history to argue 
that the Indian economy had been stagnant and un- 
changing since the time of Alexander the Great, and 
therefore was fair game. Second, he invented an in- 
credible legal argument for the seizure of all Indian 
property by British dope dealers: The Mogul emperor, 
said Mill, owned all land, and no institution of private 
property existed prior to Britain's presence in India. 
The East India Company, therefore, should claim the 
same rights as the Mogul empire! 

In point of fact, total economic stagnation occurred 
in only one period of Indian history — the rule of the 
British Empire. "The British were the first conquerors 
of India who showed gross indifference to public utili- 
ties," wrote the great economist Rosa Luxemburg. 
"Arabs, Afghans, and Mongols had organized and 
maintained magnificent works of canalization in India; 
they had given the country a network of roads, spanned 
the rivers with bridges and seen to the sinking of 
wells. . . . The East India Company which ruled India 
until 1858 [before the Crown took over direct rule] did 
not make one spring accessible, did not sink a well, nor 
build a bridge for the benefit of the Indians." 48 

James Mill rose rapidly to the position of Chief 
Examiner of Indian Correspondence, the head of East 
India Company operations in London. Jeremy Ben- 
tham, who adopted Mill as his disciple in 1808, said 
happily, "Mill will be the living executive — and I shall 
be the dead legislative of British India." 

The Fraud of Free Enterprise 129 

As Bentham slowly went mad in middle age, Mill 
mediated between the old goat and the outside world. 
Bentham "came to write in a language which grew 
more and more obscure, and he made for himself a new 
terminology which he might indeed call 'natural' in 
contrast to the 'technical' terminology which was in use 
in the courts, but which in reality constituted a new 
technical terminology," 49 a kind of Orwellian News- 
peak. "It was to James Mill that this hermit, this 
maniac, owed the fact that he became the popular chief 
of a party that was half philosophical and half politi- 
cal," wrote Bentham's biographer. 50 

David Ricardo, who sat on the Court of Proprietors 
(board of directors) of the East India Company, had 
arranged for Mill's appointment as Chief Examiner, 
and Mill returned the favor by conducting a two- 
decade-long propaganda campaign on behalf of Ri- 
cardo that manufactured the latter's reputation as a 
"classical economist." 

Ricardo, the "father of the quantity theory of 
money," 51 is the most direct link to Milton Friedman. 
Unlike Friedman, however, Ricardo was — as a major 
stockholder and theoretician for the East India Com- 
pany — concerned with real economics, to the extent of 
specifying what wealth was available to be looted. This 
is the origin of the "theory of differential rent" that 
American System economist Henry Carey devastated 
some forty years later. Ricardo offered this theory in his 
Principles of Political Economy and Taxation, which 
appeared a year after Malthus's work, as a set of policy 
recommendations for the Indian, and secondarily the 
British, tax system. 

130 The Ugly Truth About Milton Friedman 

The rent theory proceeds from Malthus's population 
argument. Increasing population, Ricardo wrote, will 
outstrip available resources of food. Therefore, addi- 
tional land must be brought into cultivation. However, 
since the best land is presumably put under cultivation 
first, the additional food requirement means putting 
inferior land under the plough. The cost in terms of the 
labor of producing food on inferior land is, of course, 
greater. Therefore, the price of grain must rise to meet 
the higher production costs of the last land brought into 
cultivation. What of the landowners who are lucky 
enough to hold land more fertile than the average? They 
also sell their grain at the higher price. In addition to 
the normal profits they always obtained on capital 
invested in agriculture, they receive a premium, or rent, 
according to the differential fertility of their land. 

Like William Petty and Adam Smith, Ricardo was 
sufficiently concerned with the requirements of financ- 
ing the British national debt and the Indian administra- 
tion costs that he specified sources of tax revenues. He 
grudgingly distinguished between nonproductive and 
productive labor, and recommended taxing rental in- 
come as an unearned, nonproductive revenue. Malthus, 
in his textbook, also recommended that Indian tax 
policy should impose rent according to the differential 
fertility of land. But, in the case of England, Malthus 
remonstrated against taxing rents, precisely because 
they were unproductive! Since continued productive 
investments would supposedly lead to a fall of profits 
and the end of economic growth, Malthus argued, the 
only means of postponing economic crisis was to siphon 
capital off into nonproductive consumption, such as 
into the consumption of landlords and of parsons like 

The Fraud of Free Enterprise 131 

himself! As Keynes later wrote, this was the origin of 
Keynesian economics. 52 

Several rungs down the Darwinian ladder, the Ri- 
cardo-Malthus debate was repeated dully in the ex- 
change between Milton Friedman and James Tobin 
reviewed in Chapter 1 . What makes both sides of the 
argument so grossly fraudulent is that it occurs in an 
imaginary zero-growth universe, in which improvement 
in technology has been eliminated. Under East India 
Company rule, such a zero-growth regime existed in 
India, as indeed it did in every area under British 
colonial rule. As American economist Henry Carey 
pointed out, the application of technology to agriculture 
eliminates the so-called differential rent entirely. 53 Land 
improvements made during the period between the pub- 
lication of Malthus's Essay on Population and Ricardo's 
Principles of Political Economy made nonsense out of 
differential rent at the very moment that Ricardo was 
preparing to preach the doctrine. 

Ricardo's economics in practice 

Only to the extent that India under the East India 
Company was a laboratory for zero-growth doctrines 
does Ricardo's theory have any more to do with the real 
world than Friedman's. The doctrine itself, whatever 
vessel it is dished into, is no different than the doctrine 
that Aristotle put forth in The Politics. Aristotle de- 
nounced the view of Solon, the builder of Athens, that 
"no bound is set on riches for man." 54 

"But the best is," Aristotle wrote, "that the wealth 
should be provided at the outset by nature. For it is a 

132 The Ugly Truth About Milton Friedman 

function of nature to provide food for whatever is 
brought to birth, since that from which it is born has a 
surplus which provides food in every case. We conclude 
therefore that any form of money-making that depends 
on crop and animal husbandry is for all men in accord- 
ance with nature. Money-making then, as we have said, 
is of two kinds; one which is necessary and acceptable, 
which we may call administrative; the other, the com- 
mercial, which depends on exchange, is justly regarded 
with disapproval, since it arises not from nature but 
from men's dealings with each other. Very much dis- 
liked also is the practice of charging interest; and the 
dislike is fully justified, for interest is a yield arising out 
of money itself, not a product of that for which money 
was provided. ... Of all ways of getting wealth this is 
the most contrary to nature." 55 

That, in the words of the greatest professional liar of 
all time, 56 is the quantity theory of money. Ricardo's 
"quantity theory," introduced in the Bullion Debates of 
1810, had precisely the same content as Milton Fried- 
man's. Friedman, in his 1956 study of the Nazi econ- 
omy, praised Hitler for holding down the rate of money 
creation by adding to the population under Nazi rule, 
and therefore spreading the volume of money over a 
larger number of users. Friedman left out of his account 
the fact that most of these users were headed for the gas 
ovens. Ricardo proposed to peg the value of the pound 
sterling in terms of gold to the rate of opium addiction 
in China. Both Friedman and Ricardo use as window 
dressing the following simple-minded tautology pro- 
posed by David Hume: 

"It seems a maxim almost self-evident, that the prices 
of everything depend on the proportion between com- 

The Fraud of Free Enterprise 133 

modities and money, and that any considerable altera- 
tion on either has the same effect, either of heightening 
or lowering the price. Increase the commodities, they 
become cheaper; increase the money, they rise in value. 
As, on the other hand, a diminution of the former, and 
that of the latter, have contrary tendencies." 57 

Hume's seeming tautology is an outright fraud. Ri- 
cardo was as much of a fraud as was Milton Friedman 
on the matter of the money supply of the German Nazi 
economy. However the essential fraud of the quantity 
theory of money has to do with monetarism's insistence 
on leaving the real economy "out of the system," in 
Milton Friedman's phrase. 

Ricardo took this to ludicrous extremes, beginning 
with the so-called Bullion Debates of 1810, when the 
Benthamites employed hearings in the British Parlia- 
ment on the then-explosive inflation crisis to sound out 
Ricardo's "quantity theory." Fifteen years of the Na- 
poleonic Wars had broken the British economy; only 
ten years earlier William Pitt had ordered the starvation 
of useless eaters rather than pay poor relief. Ricardo 
proposed drastic reductions of money in circulation, in 
other words, a credit contraction by the Bank of Eng- 
land. Since the supply of goods had contracted, due to 
chronic poor harvests and other factors, Ricardo argued 
that the problem was an excess of commodities relative 
to goods! 

"England, in consequences of a bad harvest, would 
come under the case of a country having been deprived 
of a part of its commodities, and, therefore, requiring a 
diminished amount of circulating medium. The cur- 
rency which was before equal to her payments would 
now become super-abundant and relatively cheap." 58 

The Fraud of Free Ent erprisi 

ted. As the managers of the national debt of B 

later of the rest of Europe, the Baring-Roth 

us made up the difference by looting the na 

Jnomies of Europe through a rentier system ( 

al debt. How different this was from Hami 

cept of national debt as the foundation for pr 

credit was shown by their first great swindle 

nch war indemnity loan of 1819. The victc 

ly Alliance powers demanded a 700,000,000 

ration from defeated France. A Rothschild-lei 

ium financed this through a European bond 

sucked England dry of capital. The plan foil 

isely Ricardo's argument before the Bullion 

ee: "An exportation of this sum" of excess n 

|ply "would restore the value of Britain's currei 

value of the currencies of other countries." 60 

entical to the evil Versailles Treaty repar; 

isely a century later, the war-debt system ere; 

perpetuating fund for rentier looting. Sine 

ts of war were contracted at sharply inflated f 

ments after the 1819 Great Deflation were 

ter in real, deflated terms. The same was true < 

|rld War I reparations, valued in inflated 191! 

y, after the Federal Reserve Bank of New Yor 

Bank of England rigged a similar deflation in i 

aring followed the spate of war financing v 

th American loan bubble. The new Latin Arm 

jntries had broken from Spain with the supp( 

ish Foreign Minister George Canning, and be 

jstitutions drafted by Jeremy Bentham in Loi 

Monroe Doctrine had been issued to prevei 

ct expansion of the British Empire in the Wi 

isphere. 61 Now the City of London opene 

136 The Ugly Truth About Milton Friedman 

floodgates of lending, and between 1823 and 1825, 
<£ 17,500,000 were paid for securities of the Latin Amer- 
ican countries, the first big "Third World" lending 
scheme. The bubble, based on a "Ponzi" system by 
which the proceeds of new loan issues paid interest on 
earlier ones, collapsed in 1826, creating the second gen- 
eral British financial crisis within the decade and the 
bankruptcies of a half-dozen Latin American and other 
debtor countries. 62 

Sir Robert Peel, who had effected the devastating 
Ricardo deflation in 1819, put the Ricardo "quantity 
theory of money" into finished form with his 1844 
Reform of the Bank of England. Historically, this 
represents a landmark in rentier finance equaled, per- 
haps, only by the 1980 banking legislation adopted by 
U.S. House Banking and Currency Committee Chair- 
man Henry Reuss. To the extent that a plethora of 
"country banks" and other institutions were still able in 
Malthus's time to finance important improvements in 
agriculture, transportation, and industry, the Peel Re- 
form eliminated these. It followed Ricardo's prescrip- 
tion word for word. The Bank Charter Act of 1844 fixed 
the total money supply of Britain at the prevailing level, 
backed by £ 14 million of government debt and other 
securities, plus part of the Bank of England's gold 

Except by increasing its gold hoard, the Bank of 
England could not by law expand the currency, no 
matter what domestic credit conditions prevailed! If 
England suffered an unfavorable trade balance and 
exported gold, the Bank of England, by law, "might 
have no alternative but to stop payment," as John 
Stuart Mill noted. 63 

The Fraud of Free Enterprise 137 

England already had a balance of trade deficit, which 
reached £-35 million annually in 1854 and £55 million 
by 1865. Ricardo had insisted that an unfavorable trade 
balance must be dealt with through deflation, as Hume 
had argued forty years before. 

How did Britain avoid financial collapse? The Ricar- 
dian Bank of England Reform of 1844 was premised on 
the growth of the opium trade. 

Two years before its passage, British guns had blasted 
open the gates of Canton, eliminating the imperial 
edicts that had interfered with the rapid growth of 
opium shipments to China. Between 1830 and 1840, the 
number of chests of opium imported into China rose 
from 10,000 to 40,000, or fourfold. By 1860, the volume 
had risen to 60,000, and by 1880 to 100,000, at a price, 
on average, of £1,500 a case. The profits of the opium 
traffic were higher than the trade deficit. Taking into 
account also the flow of debt service into London from 
virtually the entire world, what British financiers now 
call "invisible exports," or financial rake-off from other 
countries, made it possible for Britain to get by with its 
own decaying internal industry until the turn of the 
twentieth century. 

Economist John Stuart Mill, who followed in his 
father's footsteps as Chief Examiner of Indian Corre- 
spondence for the East India Company, praised the new 
system. In particular, Mill approved the almost total 
elimination of credit to industry, "as advances to man- 
ufacturers and others, who pay wages . . . may get into 
the hands of others who expend them for consumption, 
and in that case the notes do constitute in themselves a 
demand for commodities and may for some time tend 
to promote a rise in prices/' 64 The "quantity theory of 

138 The Ugly Truth About Milton Friedman 

money" eliminates "inflationary" credit to industry 
very efficiently. 

Manchester cotton merchant and philosophical radical 
Frederick Engels, Karl Marx's patron, wrote a sophis- 
ticated apology for the Ricardians that found its way 
into most modern historical treatments. The Peel Re- 
form of the Bank of England "deprived its management 
of the possibility of freely utilizing its entire available 
means at critical times," Engels wrote, "so that situa- 
tions could arise in which the banking department 
might be on the verge of bankruptcy while the issue 
department still had intact several millions of gold and, 
in addition, its entire 14 million in securities," which 
were "frozen" as backing for the circulating currency. 65 
Engels argued, in other words, that the Bank of Eng- 
land was now more vulnerable to financial crisis, be- 
cause the major part of its resources was locked up 
behind the currency issue. 

Considering how much business Engels's Manchester 
Cotton Exchange did with Indian opium producers, this 
account is disingenuous, to say the least. The Bank of 
England, of course, happily put the market through 
regular financial "crises" to redistribute the shares of 
loot among participating pirates, particularly when 
such events as the American Civil War and the emanci- 
pation of Southern slaves crimped the City of London's 
operations. However, the market was fixed by Chinese 
opium imports, and the Bank of England blithely 
suspended the Peel Reform in "crisis" periods through- 
out the remainder of the century. 

Engels's dishonesty is more important in another 
regard. The Peel "opium standard" subjected not Lon- 

The Fraud of Free Enterprise 139 

don but America to repeated financial crises. After 
Rothschild agent Andrew Jackson broke the Hamilton- 
ian Second National Bank of the United States, the 
domestic banking reserve of the United States became 
dependent on the vagaries of the international credit 
and gold markets, that is, dependent on London. 66 
Every British financial "panic" from 1835 to 1907 led to 
the calling in of loans to New York, and a resulting 
financial collapse in the United States. America's sus- 
ceptibility to British-ignited financial crises became a 
major threat to national security during the Civil War, 
and was corrected by the Lincoln administration's re- 
turn to Hamiltonian national banking, under the direc- 
tion of the great economist Henry Carey. But the 1879 
Specie Resumption Act undermined the gains of the 
Lincoln period and returned the United States to de- 
pendency on London. 67 

However evil were Ricardo and his policies, it is still 
unfair to Ricardo to compare him directly to Milton 
Friedman. Like Friedman, Ricardo thought the opium 
traffic being run through Hong Kong was the epitome 
of free enterprise; he put into their final form the zero- 
growth credit policies Friedman later reinvented; he 
apologized for a parasitical, rentier form of finance and 
fought bitterly against Hamiltonian industrial finance. 
But, to give Ricardo his due, the East India Company 
board member acknowledged the existence of real eco- 
nomic categories, if only to take inventory for looting 
purposes. He acknowledged his predecessors' use of the 
terms "constant capital," "variable capital," and "sur- 
plus" to describe the flow of tangible economic wealth. 
He proposed that rent, a category of nonproductive 

140 The Ugly Truth About Milton Friedman 

income, was particularly suited to taxation, on the 
premise that the less taken out of the productive process, 
the more there would be available to loot later on. 

Friedman adopted Ricardo's "quantity theory of 
money" through the intermediation of the band of 
occultists, theosophists, and homosexuals who ran Ox- 
ford University in the second half of the nineteenth 
century. We have several rings of a Dantean hell yet to 
traverse before we find Milton Friedman, now that we 
have made acquaintance with his ancestors. 

Milton Friedman and his wife, Rose Director Friedman, leaving 10 Downing 
Street in London after a visit to Prime Minister Margaret Thatcher. 

The British School 

John Stuart Mill, the employee of 
and apologist for the British East 
India Company. 

Jeremy Bentham, whose "felicific calculus" became the 
basis for all modern monetarism. 

Parson Thomas Malthus David Ricardo 

■tJMffi . 

. «<m 




!■ Bit * * 


«H <\ » 


IBfe.' ■ * Is 

91 ^Mwri'^^rffi 


p*"*^, ■. j 

John Maynard Keynes (r.) with the New Deal's Harry 
Dexter White. 

Otto von Hapsburg, the heir to the throne of the 
defunct Austro-Hungarian Empire. 

Richard Coudenhove-Kalergi, the founder of the Pan- 
European Union who brought the Vienna School to the 
United States. 

The Vienna School 

Friedrich von Hayek, whose book Road to Serfdom 
belies monetarism's ultimate aim. 

Nicholai Bukharin, student of the Vienna School, who 
would later argue against the industrialization of the 
Soviet Union. 

The Chicago School 







Beatrice and Sydney Webb, whose London School of Economics and 
settlement houses combined to become the model for the University of 
Chicago in the United States. 

Thorstein Veblen, the author of 
the Theory of the Leisure Class 
who ended his days as a hermit in 
the hills of California. 

The Great Crash 

Winston Churchill, who had much 
to be happy about on Black Thurs- 

John Kenneth Galbraith, 
whose book The Great Crash 
covered up London's role in 
bringing down the American 
stock market. 

Black Thursday on Wall 
Street, 1929. 


Hjalmar Schacht, Hitler's Eco- 
nomics Minister and colleague of 
the Bank of England's Montagu 


Jacques Rueff, de Gaulle's economics adviser who 
analyzed Schacht's fascist regime as "inflation turned 
inward against the economy." 


Monetarism and 
Hitler's Vienna 


There is a destiny now possible to us — the highest 
ever set before a nation, to be accepted or refused. 
We are still undegenerate in race; a race mingled 
of the best northern blood. ...We are rich in an 
inheritance of honor, which it should be our daily 
thirst to increase with splendid avarice. England 
must found colonies as fast and as far as she is able, 
seizing every piece of fruitful ground she can set her 
foot on, and teaching these her colonists that their 
first aim is to advance the power of England by land 
and sea. 

— John Ruskin to the Oxford University 
student body, 1870 

Monetarism runs like a red thread from John Ruskin' s 
band of Oxford occultists — the future leaders of the 
British Roundtable — to the Hoover Institution office of 
Milton Friedman. It entwines an initially bewildering 
series of individuals and institutions, from the econo- 
mists of the decayed Viennese court through the Uni- 
versity of Chicago, from the Fabian Society to the Pan- 

142 The Ugly Truth About Milton Friedman 

European Union, to the hard core of Hitler backers that 
has survived to the present day. Following this thread, 
we cross and recross the line between outwardly respect- 
able academic institutions and the human garbage of 
the brownshirt mobs, the narcotics traffic, and political 
assassination. We shall discover that the conventional 
labels of "right" and "left" economics are a blind. The 
trail is made up of hard-packed evidence and will give 
us the solution to the question we have so far left 
unanswered: Why is Nazi economist Milton Friedman 
in a position of great public influence in the United 
States today? 

Both The New Dark Ages and Dope, Inc. have shown 
in immense detail that the Ruskin-Jowett cult at Oxford 
created the Odin and Thule secret societies of Germany, 
the inner organization of Nazi fascism, and that the 
"geopolitics" of Mem Kampfv/as a plagiarism of British 
Roundtable strategist Halford Mackinder, through the 
Wittelsbach monarchy's Colonel Karl Haushofer, Hit- 
ler's political tutor. The notorious backing for Hitler 
until 1938 among members of the British ruling elite, 
the "Cliveden Set," merely continued what had been 
going on for much longer than Hitler had been on the 
scene. We heard earlier Jacques Rueff testify that British 
and New York financiers put Hitler and Schacht in 
power, during 1931 negotiations that Rueff attended as 
a junior French official. That Hitler was the vaunted 
"marcher lord" of the British aristocracy and the Bavar- 
ian Wittelsbach dynasty, and that their financial support 
of Hitler was no error on their part, is now documented 
in print. 

Every element of Hitler's program had been devised 

Oxford Monetarism and Hitler's Vienna 143 

seventy years earlier in Oxford by John Ruskin's back- 
to-the-Middle-Ages ideologues, known as the Pre-Ra- 
phaelite Brotherhood. Initially formed as a group of 
"artists" who proposed to reverse the Golden Renais- 
sance's advance of civilization epitomized by the artist 
Raphael, the Pre-Raphaelites branched out into politi- 
cal economy, "English" and later "Fabian" socialism, 
and a bizarre set of cult practices that ranged from 
Oscar Wilde's well-known sodomy to Madame Blavat- 
sky's theosophy. 

The brand of economics that English-speaking coun- 
tries now suffer from emerged in undiluted form from 
the teachings of Ruskin and his sponsor, Benjamin 
Jowett, the Master of Balliol College and its professor 
of political economy. Jowett is otherwise well known as 
the mistranslator of Plato who propagated the lie that 
Plato favored homosexuality, in keeping with Ruskin 
and Oscar Wilde's personal habits. 1 Specifically, the 
economics of "marginal utility" emerged as the fruit of 
a thirty-year Oxford project to finally make Bentham's 
"felicific calculus" operational. Jowett and Ruskin 
trained the entire generation of British leaders who ran 
England until after World War I — including Cecil 
Rhodes, future Prime Minister Albert Grey, future 
Prime Minister Lord Arthur Balfour, sometime British 
intelligence research chief Arnold Toynbee, British 
Roundtable founder Lord Alfred Milner, and others — 
in the pre-Hitlerian brand of race theory cited at the 
beginning of this chapter. 

"Austrian economics" emerged simultaneously as a 
Continental branch of the same cult. Interwoven, the 
Oxford and Vienna strands of pre-Hitlerian economics 

144 The Ugly Truth About Milton Friedman ____ 

defined the orientation of the University of Chicago 
through Milton Friedman's appointment as Distin- 
guished Service Professor there in the 1960s. 

The ideologue for race imperialism 

Ruskin drew around him an intellectual hit squad whose 
intended victim was industrial capitalism. One of his 
students in economics, George Bernard Shaw, founded 
the anticapitalist Fabian Society with Sidney and Bea- 
trice Webb. Under the patronage of Opium War Prime 
Minister Lord Palmerston, Ruskin began a Working- 
man's College at Oxford in 1854, staffed by Dante 
Gabriel Rossetti and other Pre-Raphaelites. These were 
the counterpart in England of their collaborator Rich- 
ard Wagner, Hitler's favorite composer, and the great 
propagandist of the Teutonic race myth. The Ruskin 
project first issued the slogan "Back to the Land!" This 
cry was later adopted by the Hitler youth movement 
and today's environmentalists. 

Because of the countercultural socialism of Ruskin 
proteges William Morris and Oscar Wilde, and the 
association of Ruskin's Workingman's College with the 
Fabian Society, Ruskin is viewed as a "left-winger" by 
conservative American writers. 2 The characterization is 
misleading. Ruskin's anticapitalism was, at root, pro- 
feudalist oligarchism. 

Ruskin drew his inspiration from his teacher, mystic 
writer Edward Bulwer-Lytton, the author of the novel 
Rienzi, which formed the libretto for Richard Wagner's 
first opera. A leader of the Order of St. John of 
Jerusalem and colonial minister during the Opium 

Oxford Monetarism and Hitler's Vienna 145 

Wars, Bulwer-Lytton comes down to us as the most 
hidebound of British reactionaries. His son became 
viceroy of India during the height of opium production 
during the 1880s, and gave the young Rudyard Kipling 
his start in life. 

The Pre-Raphaelite Brotherhood itself declared its 
goal to be the extension of "medieval romanticism," 
and looked to the official court painters of Metternich's 
Holy Alliance for inspiration. Formed by the English 
members of a group of Metternich student artists who 
in 1810 made their home at the Villa Malta, the Rome 
headquarters of the Order of St. John of Jerusalem, the 
Pre-Raphaelites had an "inclination toward the Middle 
Ages ... the fantastic often interwoven with the real," 
according to the Viennese artist Franz Pforr. 3 To this 
group of English painters were added such poets as 
Alfred, Lord Tennyson. They proceeded to saturate 
English-language culture with the same medievalism 
created a generation earlier by the Vienna Jesuits as a 
weapon against the humanism of Friedrich Schiller. 
This interplay between the Jesuitry of the Bavarian 
Wittelsbach dynasty and the British Empire produced 
nearly everything that is rotten in modern culture. The 
Pre-Raphaelite Brotherhood itself, ensconced at Oxford 
with John Ruskin from the 1850s onward, became the 
rallying point for a projected final assault on the fruits 
of the Renaissance: industrial capitalism and the repub- 
lican nation-state. 

It would be a mistake to view Ruskin as an aberration 
of Victorian England. On the contrary, his chair at 
Oxford University in fine arts was created in 1870 by 
the Royal Colonial Institute. The Royal Colonial Insti- 
tute had been established only two years earlier by the 

146 The Ugly Truth About Milton Friedma n 

major clearing banks, including Barclay's, Lloyd's, the 
old Baring house, the opium trading giant Jardine 
Matheson, and the Sassoon bank. In 1864, the same 
group of families had founded the Hongkong and 
Shanghai Bank as a central bank for the opium trade, 
opening a new era in British overseas finance. The rise 
in narcotics revenues was to replace the loss of income 
from the American slave system, which had been fi- 
nanced and backed politically by London until the end 
of the American Civil War. 

The first staff economists of the Royal Colonial 
Institute were Ruskin and Jowett's prize students — 
W. S. Jevons and Alfred Marshall — renowned as the 
"founders of modern economics." 

The principal weapon of Ruskin and his colleagues 
was exactly what it had been during the early 1790s, 
when Jeremy Bentham's agents Danton and Marat led 
the Jacobin mob against French science. Whether this 
mob wore the red shirts of Lord Palmerston agent and 
Young Italy leader Garibaldi, or the black shirts of 
Mussolini, has been immaterial to the apostles of unrea- 
son at Oxford. There is no more difference between 
these colorations of the Jacobin mob than there is 
between the brand of "medieval socialism" propagated 
by Ruskin and Bernard Shaw and the "medieval social- 
ism" of the German National Socialists. 

Accordingly, Ruskin's entry into politics came in 
1871 under Benjamin Jowett's sponsorship, with the 
"Letters to the Working Men of England." Ruskin 
proposed to eliminate the industrial centralization and 
division of labor brought about by the industrial revo- 
lution, in favor of an "aesthetic movement." 

Nothing that American college students suffered dur- 

Oxford Monetarism and Hitler's Vienna 147 

ing the 1960s compares with the training Ruskin gave 
to the sons of the British elite at Oxford. "All education 
must be moral first, intellectual secondary," he wrote. 
"Intellectual before moral education is ... a calamity." 
That meant ordering Oxford art students to spend a 
semester building a road, on the model of Mao's 
Cultural Revolution education programs. Ruskin's col- 
league William Morris, "the Father of English Social- 
ism," "reconciled the medieval alliance of nobles and 
peasants," in Morris's own words, "and used it against 
the factory owners and capitalists." After graduating 
from Ruskin 's Workingman's College at Oxford, Mor- 
ris set out to revive the tradition of medieval guild 
craftsmanship, what he called "the work of the ancient 
handy craftsmen." 

"The leading passion of my life is hatred of modern 
civilization. . . . The only healthy civilization was that 
of the Middle Ages before the decline set in with the 
Renaissance and the Industrial Revolution," he wrote. 4 

Morris created in 1884 the Socialist League, with 
Marx's daughter Eleanor and her husband Edward 
Aveling; he later established the Hammersmith Socialist 
Society, which became implicated in several anarchist 

Another Ruskin product was Oscar Wilde, whose 
trial for homosexuality was the great scandal of the 
1890s. In his essay "The Soul of Man Under Socialism," 
Wilde wrote that socialism is "romantic individualism 
and an improvement of the lot of workers, the latter to 
be achieved not through money but through the 
arts. . . . Pleasure is nature's test, her sign of approval. 
When a man is happy he is in harmony with himself 
and the environment." Morris and Wilde's assault on 

148 The Ugly Truth About Milton Friedman 

industrial capitalism found its great apostle in the 
United States in the person of Thorstein Veblen, the 
University of Chicago economist who trained Milton 
Friedman's teachers. 

But the economic theory of the medieval reaction was 
not yet invented. Benjamin Jowett set an entire genera- 
tion of Oxford graduate students to the task of complet- 
ing Bentham's attempt to base economics solely on the 
pleasure-pain principle. Among these were W. J. Jevons, 
F. X. Edgeworth, and Alfred Marshall — names found 
in any standard textbook history of "modern econom- 
ics." The first two were, as the profession sadly admits, 
among the most deplorable kooks in the history of 
economics. The last, Alfred Marshall, is revered as the 
founder of modern monetarism. 

From Oxford to Chicago 

Let us look at Oxford kookenomics through the eyes of 
Wesley Clair Mitchell, Milton Friedman's teacher and 
the founder of the National Bureau of Economic Re- 
search that sponsored him. Adopted by the Oxford 
group as an undergraduate at the University of Chi- 
cago, Mitchell is known as the American founder of 
business cycle theory and is something of a saint among 
the economics profession. He was, as we shall discover, 
one of the biggest kooks of them all, starting his career 
at the feet of Thorstein Veblen and the Austrian School 
feudal throwbacks, and concluding it as part of the 
American connection to the pro-Nazi Pan- European 
Union. His is an excellent introduction to the company 
we must keep in this chapter. 

Oxford Monetarism and Hitler's Vienna 149 

Bentham's fault, wrote Mitchell, lay in his great 
achievement: "In his Principles of Morals and Legisla- 
tion, indeed, he . . . discussed thirty-two 'circumstances 
influencing sensibility* to pleasure and pain. Since these 
thirty-two circumstances exist in an indefinite number 
of combinations, it would seem that the felicific calcu- 
lus can scarcely be applied except individual by in- 
dividual — a serious limitation." 5 The mathematical dif- 
ficulties sprang also from a perverse sort of diminishing 
returns on additional increments of pleasure, for, as 
Mitchell quotes Bentham, "by high doses of the exciting 
matter applied to the organ, its sensibility is in a manner 
worn out." 6 Bentham devoted great effort to classifying 
the principle of utility, of which he said modestly, "I 
took it from Hume": 

"To a person considered by himself, the value of a 
pleasure or pain considered by itself, will be greater or 
less, according to the four following circumstances: 1. 
Its intensity. 2. Its duration. 3. Its certainty ... 4. Its 
propinquity. . . . But when the value of any pleasure or 
pain is considered for the purpose of estimating the 
tendency of any act by which it is produced, there are 
two other circumstances to be taken into account; these 
are, 5. Its fecundity ... 6. Its purity. . . . [When a 
community is considered, it is also necessary to take 
account of] 7. Its extent; that is, the number of persons 
to whom it extends." 7 

As such, the "felicific calculus" becomes messy. 
Thirty-two sources of pleasure and pain with seven 
degrees of intensity produce more than 10 62 possible 
combinations for the single individual. Undaunted, 
Bentham, with visions of becoming the Newton of the 
Moral World, proposed to put the "calculus" into 

150 The Ugly Truth About Milton Friedman 

practice. His Panopticon proposal for "prison reform" 
envisioned a combination concentration camp and 
Skinner Box, and became the adopted model for all 
modern forms of brainwashing torture. 8 However, un- 
published manuscripts obtained and released by his 
twentieth- century adherents point a way out of the 
morass of complications. As Mitchell wrote: 

"If then, speaking of the respective quantities of 
various pains and pleasures and agreeing in the same 
propositions concerning them, we would annex the 
same ideas to those propositions, that is, if we would 
understand one another, we must make use of some 
common measure. The only common measure the nature 
of things affords is money. ... I speak and prompt 
mankind to speak a mercenary language. . . . Money is 
the instrument for measuring the quantity of pain or 
pleasure. Those who are not satisfied with the accuracy 
of this instrument must find out some other that shall 
be more accurate, or bid adieu to Politics and Morals." 9 

Unfortunately, Mitchell commented, "Bentham did 
not follow up this promising lead," 10 and economics 
"remained substantially where Ricardo had left it in 
1817. " n Bentham died a recluse, madder than a hatter, 
willing his body to be mummified and placed at the 
University of London. Upon tipping the janitor, it may 
still be viewed there in a closet. 

Various economists, including Menger, Walras, and 
Clark, attempted to replace Ricardo's "value" with the 
new principle, "utility," but "what they had found 
turned out to be merely a new variety of the Ricardian 
species," Mitchell continued. "Less noticed but more 
important in the long run was the issue Jevons raised by 

Oxford Monetarism and Hitler's Vienna 151 

making his doctrine of utility rest explicitly upon Ben- 
tham's psychology of pleasure and pain." 12 

William Stanley Jevons, best remembered today as 
the "sunspot" economist, graduated from Bentham's 
University College in 1855 and published his Theory of 
Political Economy in 1871. "The ultimate quantities 
which we treat in Economics," said Jevons, "are Plea- 
sures and Pains. But it is convenient to transfer our 
attention as soon as possible to the physical objects or 
actions which are the sources of pleasures and pains." 13 

However, Mitchell says disapprovingly, Jevons 
"pushed the use of money farther into the background" 
in his unsuccessful attempt to arrange productive rela- 
tions according to the pleasure-pain principle. "Value 
depends solely on the final degree of utility. How can 
we vary this degree of utility? — By having more or less 
of the commodity to consume. And how shall we get 
more or less of it? — By spending more or less labour in 
obtaining a supply." 14 Labor was a pain submitted to 
for the pleasure of consuming. Capital investment was 
another pain — of postponed consumption — measured 
by intensity (the amount of capital) and duration (the 
maturity period of the investment). "The first modern 
book on economics," said John Maynard Keynes of 
Jevons's Theory of Political Economy. 15 But it did not 
yet solve the schizophrenic paradoxes left by Jeremy 

Jevons, predictably, was a raving Malthusian. In 
1865, during a period of national pessimism brought on 
by the end of Britain's kept plantation system in the 
American South, he published The Coal Question: An 
Inquiry Concerning the Progress of the Nation and the 

152 The Ugly Truth About Milton Friedman 

Probable Exhaustion of our Coal Mines. He argued, 
following Malthus, that continued industrial expansion 
demanded "geometrical growth" of coal mining, which, 
of course, was limited by nature. He propounded a 
"Natural Law of Social Growth," whose conclusion 
was: "So far, then, as our wealth and progress depend 
upon the superior command of coal, we must not only 
stop — we must go back." 16 Since the time of the great 
Malthus, argued Jevons, importation of grain had 
eliminated Britain's subsistence dependency on agricul- 
ture, but that merely "throws us from corn upon 
coal." 17 Short of Malthus's own dishonest prediction of 
a food shortage because of increased population, no 
more stupid prediction has ever been made by any 

In later years, Jevons's occult efforts to penetrate the 
secrets of the "trade cycle" drove him to insanity. An 
1878 paper presented before the British Association for 
the Advancement of Science argued that the eleven-year 
cycle of sunspots caused a similar cycle of price fluctua- 
tions. Batty as the argument sounds, it was debated 
until well into the twentieth century by British econo- 
mists. As late as 1911, Jevons's son wrote a paper 
defending the hypothesis. John Maynard Keynes later 
argued that Jevons's method was correct, although his 
data were unfortunately proven inaccurate! 18 "By using 
these methods," Keynes said, "Jevons carried econom- 
ics a long stride from the a priori moral sciences towards 
the natural sciences built on a firm foundation of 
experience." Jevons drowned while bathing in 1882. 

Meanwhile, Jowett's prize pupil from Balliol College, 
Oxford, was busy writing index numbers and mathe- 
matical formulas to make Bentham's felicific calculus 

Oxford Monetarism and Hitler's Vienna 153 

practicable. Francis X. Edgeworth was Britain's most 
famous economist during his lifetime, editing the Eco- 
nomic Journal from its founding in 1891 to 1926. In an 
1881 volume entitled Mathematical Psychics, on the 
"calculus of Feeling, of Pleasure and Pain,'* Edgeworth 
"attempted to illustrate the possibility of Mathematical 
reasoning without numerical data. . . . We cannot count 
the golden sands of life; we cannot number the 'innu- 
merable smiles of seas of love'; but we seem to be 
capable of observing that there is here a greater, there a 
less, multitude of pleasure-units, mass of happiness; and 
that is enough." 19 

Cambridge's Alfred Marshall, Wesley Clair Mitchell 
reports at length, solved the problem of following 
through on Bent ham's original suggestion. Marshall 
declared that "money is the center around which eco- 
nomic science clusters ... it is the one convenient means 
of measuring human motive on a large scale." Marshall 
added: "If we then wish to compare even physical 
gratifications, we must do it not directly, but indirectly 
by the incentives which they afford to action. . . . The 
force of a person's motives — not the motives them- 
selves — can be approximately measured by the sum of 
money which he will just give up in order to secure a 
desired satisfaction; or again by the sum which is just 
required to induce him to undergo a certain fatigue." 20 

In conclusion, Mitchell wrote in 1916: "Among recent 
tendencies in economic theory none seems to me more 
promising than the tendency to make the use of money 
the central feature of economic analysis . . . (it) is a 
tendency to be fostered." 21 Thus, Mitchell announced 
an evil project which eventually found a name: Milton 

154 The Ugly Truth About Milton Friedman 

With Marshall, Benthamism splits into what have 
remained "right-wing" Vienna and "left-wing" Fabian 

According to Bernard Shaw, the Fabian Society had 
the object of "solving the social problem by a combi- 
nation of peasant proprietorship with neo-Malthusian- 
ism," 22 on the model of William Morris's "English 
Socialism." Fabian Society founder Sidney Webb, later 
patron of both the University of Chicago and the 
London School of Economics, began as a follower of 
John Stuart Mill. 23 But Bernard Shaw "became a con- 
vinced Jevonian, fascinated by the subtlety of Jevons's 
theory and the exquisiteness with which it adapted itself 
to all the cases that had driven previous economists, 
including Marx, to take refuge in clumsy distinctions 
between use value, exchange value, labor value, supply 
and demand value, and the rest of the muddlements of 
that time." Accordingly, Shaw reported, "the abstract 
economics of the Fabian Essays are, as regards value, 
the economics of Jevons." 24 

The only Fabians who really understood economics, 
Shaw complained, were "Sidney Webb and myself." 
"Ruskin's name was hardly mentioned in the Fabian 
Society," he charged. "My explanation is that . . . the 
Fabians were inveterate Philistines. My efforts to induce 
them to publish Richard Wagner's Art and Revolution, 
and later on, Oscar Wilde's The Soul of Man under 
Socialism, or even to do justice to William Morris . . . 
fell so flat that I doubt whether my colleagues were even 
conscious of them." 25 

Nonetheless, the Fabian leaders harkened to the 
Oxford kooks. Shaw beat the drum for the master race 
in Man and Superman (1901) and other Wagnerian 

Oxford Monetarism and Hitler's Vienna 155 

sallies before anyone had heard of Hitler. Webb built 
the British Labour Party out of this foul stuff. One of 
his last actions was to move the Austrian School of 
"conservative" economics — von Hayek and all — to the 
"Fabian" London School of Economics. 

The Viennese disease 

The British economists, finally ensconced at Cambridge 
under Alfred Marshall, felt constrained to at least talk 
in polite terms of industrial capitalism. Not so their 
Viennese first cousins, the excrescence of the most 
decayed state in Europe, the Austro-Hungarian Empire. 
What the British economists fashioned out of a hedon- 
istic, environmentalist assault upon industrial society, 
the Austrian School made into an attack on natural 
science itself. Nazism bred in this swamp, where Hitler 
spent his youth. The union of the British and the 
Austrian schools, to which Wesley Clair Mitchell com- 
mitted his life, produced the University of Chicago and 
Milton Friedman. 

Since Metternich's Holy Alliance — the great reaction 
enforced by the political police and the Jesuits — Vienna 
had been the continental capital for British influence. 
Its ruling family, the Hapsburgs, intermingled with the 
Bavarian House of Wittelsbach, the center of Jesuit evil 
in Europe since the sixteenth century. What later be- 
came known as Nazi ideology was the official Vienna 
court doctrine. Hapsburg Empress Elizabeth, a Wittels- 
bach and a cousin of Queen Victoria, was a friend and 
admirer of the British founder of "German race sci- 
ence," Houston Stewart Chamberlain. A ferocious pa- 

156 The Ugly Truth About Milton Friedman 

gan, Chamberlain married the daughter of Richard 
Wagner, the proto-Nazi composer who had been lifted 
out of poverty by Wittelsbach King Ludwig I. The 
Wittelsbachs had built Wagner his shrine at Bayreuth, 
the festival opera house that later became the cult center 
of Nazism. 

The entire military apparatus of the Wittelsbach 
family, later to become the core of the Hitler SS, was 
tutored in the "geopolitical" theories of Sir Halford 
Mackinder, leader of John Ruskin's two successor 
organizations, the Roundtable and the Fabian Society. 26 

Financially, Vienna was the territory of the Austrian 
branch of the House of Rothschild, then at the acme of 
its power in England and abroad. From its London 
headquarters, the Rothschild family bankrolled the 
British Roundtable and Cecil Rhodes's designs in Af- 
rica. In Austria, the family controlled the Austrian 
national debt (starting from the Congress of Vienna in 
1815), the Rothschild-built national railroads, and the 
Tyrolean silver mines. Its power was not broken until 
the collapse of the Austrian currency and the dismem- 
berment of the empire after the First World War. 
Wittelsbach Empress Elizabeth's closest personal friend 
was Julie de Rothschild, the sister of the head of the 
Austrian branch of the family, Baron Albert de Roth- 

The same year that Jevons's Theory of Political Econ- 
omy appeared in London, an obscure Galician noble- 
man, Karl von Menger, brought out a virtually identical 
work, Principles of Economics (Griindsatze der Volk- 
swirtschaftslehre). But for Rothschild scribbler Karl 
Kraus, the most famous journalist in Vienna and the 
lion of the salons, Menger might have passed into 

Oxford Monetarism and Hitler's Vienna 157 

oblivion. Kraus reviewed the work favorably, and Men- 
ger won a professorship at the University of Vienna. 
Although, as Ludwig von Mises later complained, 
"none of his teachers, friends, or colleagues took any 
interest" in von Menger's work, the Empress Elizabeth 
appointed him tutor to Crown Prince Rudolf in 1876. 
Rudolf and von Menger toured Europe for the next 
three years. Imperial approval or no, "until the end of 
the seventies there was no 'Austrian School.' There was 
only Karl Menger," wrote von Mises. 27 

Two books appeared in 1883, whose publication 
marks the formal birth of the Austrian School. One was 
Menger's tract, Investigations on Method, an assault on 
the Prussian economics that still ruled German-speak- 
ing academia. More important was Ernst Mach's Sci- 
ence of Mechanics, the first cannonade of radical posi- 
tivism in the sciences. Mach attacked the foundations of 
science itself. Undoubtedly the leading intellectual 
power in Vienna, Mach proclaimed the principle of 
irrationality that, years later and in cruder form, ap- 
peared in Milton Friedman's The Methodology of Posi- 
tive Economics. 

Human thought "has nothing to do with the physical 
world itself," Mach wrote. Newtonian science, he ar- 
gued with a sort of perverse accuracy, had never prop- 
erly defined its terms. The Newtonian universe was still 
filled with metaphysical mysteries, such as "action at a 
distance" and the law of inertia. Newton's particles 
moving in a fixed time and space by fixed laws were an 
epistemological absurdity. 28 

At Gottingen University, physicists and mathemati- 
cians like Gauss, Weierstrass, and Bernard Riemann 
had already identified the solution to the Newtonian 

158 The Ugly Truth About Milton Friedman 

disaster along lines proposed two generations earlier by 
Lazare Carnot. Instead of the entropic Newtonian 
world, which runs down if it is not "wound up like a 
clock," the Gottingen scientists described the "nested 
manifolds" of increasingly complex geometries that 
correspond to increasingly higher orders of self-organi- 
zation of energy. LaRouche demonstrated in 1951 that 
the mathematics of Riemann and Georg Cantor pro- 
vides the solution to the problem of deterministic 
models of economic expanded reproduction through 
the introduction of advanced technology. 

Mach, however, took Newton's failure as the starting 
point for the extreme form of know-nothingism that 
came to be known as "radical positivism." Mach dis- 
missed Riemann's conception of ascending orders of 
physical space — subsequently rigorously proven in both 
physics and economics — as "merely conceivable." All 
that science could inspect were "the properties of actual 
space . . . directly exhibited as objects of experience. As 
mathematical helps of this kind, spaces of more than 
three dimensions may be used. But it is not necessary 
to regard these ... as anything more than mental ar- 
tifices." 29 

The history of science proves Mach to be a scoundrel. 
Half a century before experimental physics produced 
them, Riemann projected the existence of "shock 
waves," that is, the higher-energy organization of gases 
under pressure following the rapid addition of energy. 
Riemann's partial-differential equations for shock 
waves formed the basis of the construction of the 
hydrogen bomb a century after he wrote them, as Dr. 
Edward Teller has pointed out. 30 

Mach's counterproposal to Riemann was to revert to 

Oxford Monetarism and Hitler's Vienna 159 

nominalism. "The world consists only of our 
sensations," Mach wrote, "in which case we have 
knowledge only of sensations." 31 In this case, Mach 
continued, our perceptions of the physical universe have 
no direct connection whatsoever to the actual physical 
universe. If we perceive a force such as gravity acting at 
a distance, we merely name it "gravity," and leave 
matters there. Ten years after his first book appeared, 
Mach was awarded a new University Chair of Experi- 
mental Philosophy by Empress Elizabeth. Vienna's sa- 
lons lionized him, and a generation of scientists, philos- 
ophers, and musicians learned at his feet. A close friend 
was Empress Elizabeth's appointee as Director of the 
Vienna State Opera, the neurotic composer Gustav 
Mahler. Mahler had earlier studied under fellow Wit- 
telsbach favorite Richard Wagner, on a stipend from 
Baron Albert de Rothschild. 

Mach held court with journalist Karl Kraus at the 
salon of Karl Wittgenstein, a Jewish steel magnate who 
had grown wealthy supplying Albert de Rothschild's 
railroads. To these sessions Mahler brought his leading 
student Arnold Schonberg who later wrote to Karl 
Kraus, "I have learned more from you, perhaps, than a 
man should learn." 32 Schonberg referred to the Ma- 
chian inspiration for his abandonment of tonality in 
music in favor of the atonal, so-called twelve-tone 
system. Schonberg was correct; his music was the 
equivalent of Mach's antiscience. Tonality, the system 
of equal tempering that prevailed for at least 3,000 years 
before Schonberg, is the link between the physics of 
vibrating strings and the science of poetic irony. 33 
Schonberg' s "discovery" marked the termination of the 
tradition of classical composers. 

160 The Vgly Truth About Milton Friedman 

Out of this degenerate climate came von Menger's 
statement of economic method, the primal Austrian 
School denunciation of state intervention into economic 
life. The target of von Menger's work was the now- 
obscure German Gustav von Schmdller, chairman of 
the economics department at the University of Berlin 
and the reigning defender of the German system of 
protectionism. The German protection policy was the 
legacy of the great economic scientist Friedrich List, the 
heir of the Carnot tradition and the collaborator of the 
forces around the Marquis de Lafayette in France and 
in the United States. List's Customs Union inside 
Germany, combined with protection against British 
dumping, ensured that German industry would not 
suffer the catastrophic consequences of Britain's "free 
trade" policy. Like Carey's policies during the Lincoln 
administration, List's success enabled Germany to share 
with America the highest rates of individual growth 
recorded in human history. 

At the time von Menger published his denunciation 
of protection and his call for "free trade," Germany was 
registering 20 percent annual growth rates in steel, 
chemicals, and other basic industry. During this period 
of maximum growth, German industrialists were devot- 
ing upward of one fifth of their net profits to research 
and development, a policy that resulted in an explosion 
of new technological advances. Germany's economic 
power overtook Britain's during the 1890s. The "Grand 
Design" program of French Minister Gabriel Hano- 
taux, in potential combination with the great Russian 
industrializer Count Witte and the McKinley Republi- 
cans in the United States, represented a force powerful 
enough to sweep away the British Empire. Ruskin's 

Oxford Monetarism and H it ler's Vienna 161 

students formed the British Roundtable under the chair- 
manship of Lord Milner in response to the industrial 
threat from America and continental Europe. 34 

However inferior von Schmoller and the German 
economists of the time were to their great teacher 
Friedrich List, they had one merit: "If nothing else 
roused the suspicions of the German scholars," wrote 
Ludwig von Mises bitterly, "they would have con- 
demned economics for the sole reason that Bentham 
and Mill contributed to it." 35 Schmoller and von Men- 
ger exchanged vitriol, and what became known as the 
Methodenstreit began. Various Austrian economists, 
including von Menger's students von Wieser and his 
brother-in-law Bohm-Bawerk, held cabinet offices inter- 
mittently, presiding over the moribund Austrian econ- 
omy. They eventually won the Methodenstreit by de- 
fault, after the German 1918 defeat and the imposition 
of the Versailles Treaty and the rule of Hjalmar Schacht 
at the Reichsbank. 

In the domain of method, the Austrians took the 
vantage point of Bentham and Mach to extremes that 
appear lunatic to the modern reader. Outdoing the most 
Chinese of the old physiocrats, Ludwig von Mises wrote 
in 1912: 

"There is a naive view of production that regards it 
as the bringing into being of matter that did not 
previously exist, as creation in the true sense of the 
word. From this it is easy to derive a contrast between 
the creative work of production and the mere transpor- 
tation of goods. This way of regarding the matter is 
entirely inadequate. In fact, the role played by man in 
production always consists solely in combining his 

162 The Ugly Truth About Milton Friedman 

personal forces with the forces of nature in such a way 
that the cooperation leads to some particular desired 
arrangement of material. No human act of production 
amounts to more than altering the position of things in 
space and leaving the rest to nature." 36 

According to von Mises, not only is industrial pro- 
duction undesirable, as the Oxford kooks say; it is 
impossible. Von Mises was such an extreme know- 
nothing that he looked with contempt at the statistics- 
gathering efforts of the Vienna School's own trainee, 
Wesley Mitchell, at the National Bureau of Economic 

"Today, all over the world, but first of all in the 
United States, hosts of statisticians are busy in institutes 
devoted to what people believe is 'economic research.' 
They collect figures provided by governments and var- 
ious business units, rearrange, readjust, and reprint 
them, compute averages and draw charts. They surmise 
that they are thereby 'measuring' mankind's 'behavior' 
and there is no difference worth mentioning between 
their methods of investigation and those applied in the 
laboratories of physical, chemical, and biological re- 
search. They look with pity and contempt upon those 
economists who, as they say, rely on 'much speculative 
thinking' instead of 'experiments.' And they are fully 
convinced that out of their restless exertion there will 
one day emerge final and complete knowledge that will 
enable the planning authority of the future to make all 
people perfectly happy." 37 

To Vienna goes the dubious credit for the invention 
of the weird Stoic cult, the study of "trade cycles." 
Jevons, as we saw, went off the deep end in the attempt 
to account for the boom-bust cycles of City of London 

Oxford Monetarism and Hitler's Vienna 163 

speculation. Earlier, Malthus and Ricardo had pro- 
jected a crisis of capitalism, but as a distant Armaged- 
don caused by a permanent scarcity of resources — an 
Armageddon that, of course, never arrived. But the 
Austrian School, which in the 1920s became the Aus- 
trian Institute for the Study of Trade Cycles, portrayed 
these developments as the unfortunate consequence of 
man's misguided attempt to change the natural order, 
and the inevitability of nature's revenge. Original sin, in 
the Austrian scheme of things, is the existence of credit 
itself— that requirement for the introduction of new 
technologies and hence economic survival. Friedrich 
von Hayek issued the "classic" statement of the Vienna 
position in his 1928 Monetary Theory of the Trade 
Cycle, revised in 1932 to defend the "inevitability" of 
the 1929 crash: 

"The condition thus . . . assumed ... is the existence 
of credit which, within reasonable limits, is always at 
the entrepreneur's disposal at an unchanged price. This, 
however, assumes the absence of the most important 
controls which, in the barter economy, keep the exten- 
sion of the productive apparatus within economically 
permissible limits. Once we assume that even at a single 
point, the pricing process fails to equilibriate supply 
and demand, so that over a more or less long period 
demand may be satisfied at prices at which the available 
supply is inadequate to meet total demand, then the 
march of economic events loses its determinateness and 
a range of indeterminateness appears, within which 
events can originate leading away from equilibrium." 38 

What von Hayek is saying in the pseudoscientific 
language of Mach is that credit extension increases 
demand above the level of supply, leading to a disequi- 

164 The Ugly Truth About Milton Fr ie dman 

librium in which a crisis will shut off demand until it 
again falls to the level of supply. The possibility of mere 
extension of the economy in scale, or of the introduction 
of new technologies, whereby new supply would equal 
or exceed credit extension, never seems to have occurred 
to von Hayek. Von Hayek's little world never changes. 
Indeed, he criticizes von Mises for suggesting that 
expansionary central bank policies provoke excessive 
credit expansion. 39 He argues instead that the mere 
existence of the credit-extension powers of commercial 
banks is the cause of crises. 40 He concludes: 

"So long as we make use of bank credit as a means of 
furthering economic development we shall have to put 
up with the resulting trade cycles. They are, in a sense, 
the price we pay for a speed of development exceeding 
that which people would voluntarily make possible 
through their savings. ... If it were possible ... to keep 
the total amount of bank deposits entirely stable, that 
would constitute the only means of getting rid of 
cyclical fluctuations." 41 

As propounded by University of Chicago economist 
Henry Simons to his student Milton Friedman during 
the 1930s, that is the famous Friedman proposal for 100 
percent reserve banking. Normally, banks hold in re- 
serve only a portion of their deposits; the reserve ratio 
in the United States is 15 percent of demand deposits 
and 4 percent of less volatile savings deposits. As banks 
lend the portion of deposits not held in reserve, the 
loans are redeposited with the banks, creating new 
deposits and thus the basis for new loans. If banks were 
compelled to put up all their deposits as reserves, they 
could extend no loans; their business would consist, as 

Oxford Monetarism and Hitler's Vienna 165 

Friedman has suggested, of charging depositors for the 
privilege of depositing money. 42 

This would bring down the economy. Von Hayek, an 
octogenarian and still active, wrote the Times of Lon- 
don on February 21, 1980, to argue that governments 
had best be done with it and induce mass unemployment 
through immediate deflation. Since nature's revenge 
will occur in any event, the sooner the better; and 
besides, government will never have the political will to 
impose a slow, gradual deflation. Friedman's only point 
of disagreement with von Hayek is on the subject of 
timing; Friedman proposes slow strangulation, as op- 
posed to von Hayek's beheading of the economy. 

One hundred percent reserve banking as promulgated 
by von Mises and Friedman may seem absurd, but 
Friedman's friends in the banking community have 
already begun preparations to make it happen. New 
York's Citibank, whose economists are devout mone- 
tarists, has developed plans to eliminate commercial 
bank lending as a main feature of the bank's business. 
The bank believes that the United States is headed for a 
period of economic decline, and that the developing 
countries, into which the American banks poured funds 
during the past ten years, will not make it as credit- 
worthy customers. Therefore, consumers and industrial 
enterprises, let alone nations like Zaire or the Philip- 
pines, will not make it as clients of Citibank over the 
years ahead. 

But Citibank believes that it can still increase its 
profits by taking a fraction of a cent off the top of a 
gigantic flow of funds through the bank! For example: 

166 The Ugly Truth About Milton Friedman 

it currently plans to phase out "credit cards" and 
replace them with "debit cards." Instead of lending a 
customer money when he uses the card, the bank will 
deduct the amount instantaneously from his checking 
account — at a small service cost, of course. Citibank 
internal reports target $1.2 trillion in potential deposits 
now held by savings banks and smaller commercial 
banks, which Citibank thinks are fair game. The entire 
strategy is mad, but it is madness with a method: It is 
the only type of commercial banking that could survive 
in a zero-growth world. 

Friedman has nothing whatsoever to add to von 
Hayek's final statement of Vienna irrationalism. Unlike 
the Viennese fanatics, he occasionally uses the rhetoric 
of capital formation and productivity, an attitude those 
throwbacks had no use for. We have seen that the 
Austrian School acted as the house retainers of the same 
Wittelsbach dynasty that created Hitler, and as the 
Austrian branch of the British Roundtable economics 
of Halford Mackinder and Houston Stewart Chamber- 
lain. However, von Mises and von Hayek developed a 
convenient alibi for their behavior when Hitler kicked 
them out of Austria into the waiting arms of the 
London School of Economics. Von Hayek set out to 
prove, as in his 1944 The Road to Serfdom, that British 
economics meant "freedom" and that German econom- 
ics, including that of Friedrich List, and any economics 
favoring state intervention into the economy repre- 
sented Nazism: 

"For over two hundred years English ideas had been 
spreading eastward. The rule of freedom which had 
been achieved in England seemed destined to spread 
throughout the world. By about 1870 the reign of these 

Oxford Monetarism and Hitler's Vienna 167 

ideas had probably reached its easternmost expansion. 
From then onward it began to retreat, and a different 
set of ideas . . . began to advance from the East. Eng- 
land lost her intellectual leadership in the political and 
social sphere and became an importer of ideas. For the 
next sixty years, Germany became the center from 
which the ideas destined to govern the world in the 
twentieth century spread east and west. Whether it was 
Hegel or Marx, List or Schmoller . . . whether it was 
socialism in its more radical form or German 'organi- 
zation 1 or planning of a less radical kind, German ideas 
were everywhere readily imported, and German institu- 
tions imitated." 43 

To this day, von Hayek remains loyal to the remnants 
of the Nazi machine, gathered together in the Pan- 
European Union around the last heir of the Hapsburg 
throne, Otto von Hapsburg. How he and von Mises 
ended up in London, rather than Berlin, explains much 
about the British-sponsored fascist machine. But the 
answer to this question takes us first through Chicago. 




Economic analysis assumes men's acts are ruled by 
conscious motives [but] it is only to a limited extent 
of this character. Much of it is more or less 
impulsive and capricious. This limitation is far more 
sweeping than imagined [and] raises the fundamental 
question, how far human behavior is inherently 
subject to scientific treatments. In his views on this 
point the writer is very much of an irrationalist. . . . 
Interpretation of life as actively directed toward 
securing anything is highly artificial and unreal. It 
appears that a relatively small fraction of the 
activities of civilized man are devoted to the grati- 
fication of needs or desires having any foundation 
beyond the mere fact that impulse exists at the 
moment in the mind of the subject. 

— Milton Friedman's teacher, University of 
Chicago economist Frank H. Knight 

Although British economics has been entrenched to a 
greater or lesser extent in America since the friendship 
of Thomas Jefferson and Dugald Stewart, this country 

170 The Ugly Truth About Milton Friedman 

did not abandon the American System of Henry Carey 
and Friedrich List by slow erosion. Oxford's kook 
economists mounted an assault on America with all the 
subtlety of the landing of the Normandy invasion on 
the shores of Lake Michigan. Oxford built the Univer- 
sity of Chicago up from bare ground as a center of 
British intellectual subversion against the fundamental 
tenet of the American System — the necessity of indus- 
trial progress. 

Not until the 1929 crash did the British formula of 
limited growth gain credence among the American 
public. But the financial disaster that shattered the lives 
of a generation of Americans was not the revenge of 
nature against America's reckless optimism. As we will 
prove in detail, it was planned and executed by Britain's 
financial agents in this country, the men who gave 
Milton Friedman his start in life. 

Contrary to its present conservative reputation, the 
University of Chicago began in 1892 as the chief 
American project of the Fabian Society. The fact that it 
incorporated both the "right-wing" economics of the 
Cobden Clubs and Thorstein Veblen's imitation of 
Ruskin-Morris socialism at the outset should not be 
surprising. The new university, launched with funds 
from the Rockefeller, Schiff, and Field families, trans- 
ferred the entire package of Oxford kookery to the 
shores of Lake Michigan intact. Beatrice Webb, the 
Fabian Society stringpuller, is the real founder of the 
University of Chicago. 

The University of Chicago began its existence in 1889 
as the education program of Hull House, Jane Ad- 
dams's social work project modeled after that of the 
Fabians. For five years prior, Addams had lived in 

Monetarism In vades A merica 171 

Britain studying with Beatrice Webb and working out 
of Toynbee Hall in London, the flagship for Jane 
Addams's "settlement house" movement. Toynbee Hall 
was a workshop for the Jacobin "guild socialism" 
cooked up in the 1850s at Oxford by John Ruskin and 
his friends and transmitted into the Fabian Society via 
Sidney Webb and Bernard Shaw. Ruskin's Oxford 
undergraduates, working out of Toynbee Hall, the 
Hammersmith Socialist Society, and similar institutions, 
trooped into the London slums to recruit the cadre of 
future Jacobin mobs, offering food, shelter, and educa- 
tion. Most of the anarchist followers of British agent 
Michael Bakunin passed through Toynbee Hall at some 
point. 1 Morris's little group in Hammersmith went over 
entirely to terrorist activities. With the settlement house 
movement, Jane Addams brought terrorism to the 
United States; President McKinley's assassin was shel- 
tered at New York's Henry Street Settlement House by 
anarchist Emma Goldman. 

When Hull House was founded in 1889, London 
Times editor-in-chief William Stead accompanied Jane 
Addams back to Chicago from London for the great 
event. Stead was a frank apologist for Cecil Rhodes's 
plan for a British Empire based on white race superior- 
ity, and a persistent advocate of the "reunification" of 
Britain and America on the basis of Ruskin's imperial 
program. Funding for Hull House came from the core 
of British supporters in the United States. Future Chief 
Justice Louis Brandeis, of the Anglo-Zionist "Our 
Crowd" Manhattan financial circuit, fundraised for 
Hull House in New York, while John D. Rockefeller 
and Marshall Field made heavy contributions. The 
founding documents of the University of Chicago state 

172 The Ugly Truth About Milton Friedman 

its purpose to be the center of "ideas and theories" for 
the settlements, which would provide the "practical 
endeavors . . . providing a broad field for testing ideas 
and theories." This was the first great exercise in the 
social control techniques that now come under the 
general heading "Fascism with a Democratic Face." 

Hull House encompassed the entire group of future 
department heads of the University of Chicago. 

John Dewey began the new Department of Philoso- 
phy after a career at Hull House, returning to the 
stockyards in 1894 with his own "University of Chicago 
Settlement House" jointly sponsored by Hull House. 
Economics Department Head J. Laurence Laughlin and 
his deputy, Thorstein Veblen, were Hull House profes- 
sors. So was Charles Tufts, head of the Sociology 
Department. Tufts had come to Hull House from a job 
as labor negotiator for the Kuhn Loeb dry goods firm 
Hart, Schaeffner, and Marx. In overall charge was Yale 
Professor William Rainey Harper, brought in upon 
Jacob SchifPs recommendation. 

Economist Laughlin came to Chicago as a national 
figure: He was chief spokesman for the Cobden Clubs, 
the "free trade" organization of British bankers and 
American opium traders that opposed the Carey-List 
policy of protecting American industry against British 
dumping. McKinley Republicans of the 1890s had not 
yet succumbed to the "free trade virus," a disease that 
subdued the Grand Old Party only with the accession of 
Calvin Coolidge, Andrew Mellon, and Herbert Hoover 
some thirty years later. During the 1896 election, 
McKinley had denounced the Cobden Clubs and de- 
fended a protective tariff because it "would increase the 
demand for American labor." The purpose of a new 

Monetarism Invades America 173 

tariff bill, the future President said, "is to increase 
production here, diversify productive enterprise . . . and 
increase the demand for American workmen." 2 

Laughlin had already joined the fight on the British 
side with a slanderous attack on Alexander Hamilton 
published in the University of Chicago Journal of 
Political Economy in 1894. The article, "Hamilton as a 
Political Economist," argued that Hamilton's "infer- 
ence was hasty" that America should develop manufac- 
tures instead of remaining a rural market for Britain. 3 
Laughlin defended the spurious Ricardian theory of 
rent against Hamilton's attack and concluded that 
Hamilton's "rank as an economist is not high" com- 
pared with the "great names in the science — Adam 
Smith, Ricardo, Mill." 4 

Nearly every university lecturer today will tell the 
same lies. But in 1894 it was still a matter of controversy, 
at least in the American Midwest. An assassin's bullet, 
not Professor Laughlin, defeated McKinley protec- 

Laughlin's reputation grew. In 1897 he prepared for 
banker Paul Warburg the Report of the National 
Monetary Commission. The report formed the content 
of the Federal Reserve Act of 1913, the formal introduc- 
tion of English central banking methods into the United 

But John Dewey and Thorstein Veblen, as Wesley 
Clair Mitchell remembers it, were "our two philoso- 
phers" and made the University of Chicago what it 
was. 5 

"There was Thorstein Veblen," Mitchell wrote, "that 
visitor from another world, who dissected the current 
commonplaces that the student had unconsciously ac- 

174 The Ugly Truth About Milton Friedman 

quired, as if the most familiar of his daily thoughts were 
curious products wrought in him by outside forces. . . . 
From Veblen's philosophic view of social institutions 
and social theories a straight path led to John Dewey's 
lectures. There the student interested in any phase of 
human behavior heard a master of philosophy and 
psychology analyze the processes involved in activities, 
from dealing with a broken shoestring to constructing 
a system of metaphysics. Not less effectively than Veb- 
len, though with a different emphasis, Dewey helped an 
economist to drag out the psychological preconceptions 
lurking behind theories of value and distribution into 
consciousness." 6 

Thorstein Veblen was a half-mad Norwegian who 
terrorized undergraduates and had adopted William 
Morris's Dionysian variant of Oxford kookenomics. He 
corresponded with Bernard Shaw, Sidney and Beatrice 
Webb, Karl von Menger, and Eugen Bohm-Bawerk, 
and presented their version of Ruskin economics in his 
1899 volume, The Theory of the Leisure Class. Emulat- 
ing the Oxford medievalists, Veblen praised the prein- 
dustrial age, when "the master craftsman, embodying 
the instinct of workmanship," prevailed. "As the indus- 
trial system developed, he was separated from his tools 
[and] workmanship gave way to pecuniary drives." 
Now, Veblen expounded, instead of the worker in his 
primal state, former craftsmen "were made subservient 
to the profit-making requirements ... of the leisure 
class. . . . [who] sought to divert the social surplus to 
their own private purposes." 7 

Bentham had argued that man was bestial, but at 
least able to calculate how much pleasure or pain an 
action would bring. Veblen, immersed in studies of 

Monetarism Invades America 175 

American Indians, the Ainus of Japan, Australian bush- 
men, and Polynesian islanders, attempted to take the 
human species down a rung from Bentham! 'The 
discipline of savage life has been by far the most 
protracted and probably the most exacting of any phase 
of culture in all the life-history of the human race; so 
that by heredity human nature still is, and must indefi- 
nitely continue to be, savage human nature." 8 

From a "left-wing" critique of industrial capitalism 
on the grounds thrown up by the Pre-Raphaelite Broth- 
erhood half a century earlier, Veblen moved full circle 
to the ultraright position of von Mises and von Hayek, 
whose teachers had been Veblen's correspondents dur- 
ing the 1890s. In his last book, Veblen denounced the 
institution of credit as the source of all the industrial 
evils he deplored. The modern industrial corporation, 
he wrote in his 1924 work Absentee Ownership and 
Business Enterprise, "could never have arisen without 
corporate credit, [through which] the values of physical 
assets could be inflated." Credit meant to Veblen "the 
right of the corporation to debauch the national 
wealth." 9 

Veblen was hated at the University of Chicago, 
contrary to the impression given by his devoted student 
Wesley Clair Mitchell. By the time he left Chicago in 
1906, Veblen's lecture audiences had almost disap- 
peared; one class ended up with only one student. 10 Like 
Bentham and Jevons, he went mad at the end of his life, 
becoming a hermit in the California hills. One anecdote 
of these last years reported by economic historian 
Joseph Dorfman tells how Veblen was seized by the 
paranoid delusion that someone had stolen his plot of 
land: "He took a hatchet and methodically broke the 

176 The Ugly Truth About Milton Friedman 

windows, going at the matter with a dull intensity that 
was like madness, the intensity of a physically lazy 
person roused into sudden activity by anger."" This 
arch-hater of industry's despoilment of the "natural 
world" ended up as an environmentalist, "disturbing 
nothing of nature, not even a weed, and allowing the 
rats and skunks to brush by his legs and explore his 
cabin as he sat immobile, wrapped in unhappy distant 
thoughts." 12 

Such was the quality of inspiration at the University 
of Chicago. More important than Veblen, who merely 
burned hatred of industrial capitalism into such students 
as Wesley Clair Mitchell, was John Dewey. 

Dewey's motto — "There is no psychology but social 
psychology" — proceeded from the American pragma- 
tists' work in the Chicago slums at Hull House. The 
mind, according to Dewey, was a fixed set of inborn 
reflexes, instincts, and capacities, "inherited generation 
after generation with numberless differences as between 
individuals, but with slight changes as regards the 
species." Dewey admitted of no creative faculty. Cer- 
tainly it is true, he said, that individuals manifest new 
behavior patterns. But learning is merely "the capacity 
to form innumerable combinations among the innumer- 
able original propensities. ... It is these changing com- 
binations among substantially unchanging elements 
that differentiate the behavior of the civilized man from 
that of the savage." 13 

Scratch the surface of Dewey's benevolent "social 
psychology," and you find Jeremy Bentham's hideous 
Panopticon. Through social institutions, Dewey main- 
tained, "behavioral habits" determine how these various 

Monetarism Invades America 177 

inborn propensities combine into what ultimately is 
called "intelligence." Control the social institutions that 
form an individual, and you have controlled his mind. 

To Wesley Clair Mitchell, this was gospel revelation. It 
solved the paradoxes of "economic science" that had 
plagued the monetarists since the time of Bentham. 
Mitchell wrote excitedly: "To find the basis of rational- 
ity, then, we must not look inside the individual at his 
capacity to abstract from the totality of experience the 
feeling elements, and to compare their magnitudes" as 
Bentham proposed. "Rather we must look outside the 
individual to the habits of behavior slowly evolved by 
society and painfully learned by himself. Of course, the 
use of money is one of these great rationalizing habits. 
It gives society the technical machinery of exchange. . . . 
It is the foundation of that complex system of prices to 
which the individual must adjust his behavior in getting 
a living. . . . Since it molds his objective behavior, it 
becomes part of his subjective life. . . . Because it thus 
rationalizes economic life itself, the use of money lays 
the foundation for a rational theory of that life. Money 
may not be the root of all evil, but it is the root of 
economic science." 14 

It is not that monetarism "fits the facts of economic 
life"; the point is that men can be made to fit into 
monetarism. Mitchell finally abandoned the silly fiction 
promoted by Ricardo and even Alfred Marshall that the 
money decisions of countless individuals determine eco- 
nomic life. Why should this be the case, Mitchell wanted 
to know. The individual consumer is the most irrational 
creature on earth, he argued in an essay entitled "The 

178 The Ugly Truth About Milton Friedman 

Backward Art of Spending Money." If that were true, 
there could be no economic theory of his type. But since 
the necessity for money is "one of these great rational- 
izing habits," the individual can be made to accept the 
consequences that money dictates, even if it provokes a 
great deal of pain on the Jeremy Bentham scale. 

"The psychological type of theory [engendered by 
John Dewey's work at the University of Chicago] has 
brought money back into the very center of economics," 
Mitchell concluded. "From the use of money is derived 
not only the whole set of pecuniary concepts which the 
theorists and his subjects employ, but also the whole 
counting-house attitude toward economic activities. In 
its use are found the molds of economic rationality." 15 

How can society operate under the monetarist regime 
proposed successively by Hume, Ricardo, Marshall, and 
the Austrians, since the "quantity theory of money" 
violates the physical laws on which human society is 
based? By excluding the introduction of new technolo- 
gies, monetarism dooms society to Malthusian extinc- 
tion through failure to attain the "reducing power" that 
calls new "natural resources" into being. Long before 
the point of physical exhaustion of resources, monetar- 
ist-run economies undergo financial crisis. 

The solution, according to the quantity theory of 
money preached by Ricardo, Marshall, and Friedman, 
is to loot the real resources of the economy to meet 
accumulated demands for debt service payment. If 
individual citizens are forced into what the monetarists 
dictate to be "the molds of economic rationality," they 
can be made to undergo looting of the type imposed by 

Monetarism Invades America 179 

the Hitler regime. John Dewey, who later became an 
enthusiastic defender of Italian fascist Benito Mussolini, 
called this "social psychology. 1 * Today's fascists, who 
style themselves "the Aquarian Conspiracy," call it 
"operant conditioning." How to impose fascist eco- 
nomic measures without the "inefficiencies" of the 
Hitler and Mussolini regimes has been the major con- 
cern of the monetarists as a matter of public record since 
1974, when the Initiatives Committee for National 
Economic Planning published its manifesto entitled 
"The Coming Corporativism: Fascism with a Demo- 
cratic Face." On American soil, this project has its 
origins in 1892, when the students of Beatrice Webb 
formed the University of Chicago. 

We can now stop discussing what it is that Milton 
Friedman thinks, a line of investigation that earlier 
produced unimpressive results. We are concerned, in- 
stead, with what Milton Friedman is. He is the dream 
of Wesley Clair Mitchell come true on the television 
screens and bookshelves of American homes. From his 
place among the Falsifiers in Malebolge, we can see 
Mitchell nod in agreement with us. 

Economic behavior is what concerns us, Mitchell 
would say, not "objective" theories. The content of 
Milton Friedman's "theories" is what he persuades 
people to do. If he provokes his listeners to act in the 
manner required for the success of a fascist social order, 
that is the University of Chicago tradition. Mitchell 
once likened his beloved teacher Thorstein Veblen to 
David Hume. 16 Like Hume, and like Milton Friedman 
later, Veblen did not concern himself with the truth- 

ISO The Ugly Truth About Milton Friedman 

content of his own statements, but with the "molds of 
rationality" he could impose on his listeners. Mitchell 
and his pupil Friedman are right-wing Fabians. 

As an undergraduate, Mitchell proved his usefulness 
to the University of Chicago with a journal article, later 
published as his doctoral dissertation, entitled A History 
of the Greenbacks. 11 Mitchell denounced the Lincoln 
administration's "greenback" policy, which was ac- 
tually a financial warfare device adopted by Lincoln's 
economists as a defense against London, and praised 
the 1879 Specie Resumption Act, which brought Lon- 
don back into financial control over America and 
provoked the great 1879 depression. In 1897 Dewey and 
Laughlin sent him for a year's study with Karl von 
Menger and Eugen Bohm-Bawerk in Vienna. In 1898 
Mitchell spent a year at Oxford and took his master's 
degree, only eight years after John Ruskin's death. In 
1912, Mitchell went to Vienna for additional graduate 
studies and shared Bohm-Bawerk's classroom with fu- 
ture Soviet official Nikolai Bukharin. 

Bukharin's name on the class roll is not as surprising 
as it would seem. Already a British intelligence agent in 
training at the University of Vienna, he published in 
1914 The Economic Theory of the Leisure Class, an 
almost verbatim copy of Veblen's 1899 work, of which 
he probably learned from Veblen's famous student 
Mitchell. 18 Later, as a Soviet planner, the Vienna grad- 
uate fought unsuccessfully for the economic policies 
that Veblen had promoted in the capitalist countries: 
nonindustrial, rural development, or what is now called 
the Chinese Maoist model. 

Mitchell paid visits to Fabian Society leaders Sidney 
and Beatrice Webb and Bernard Shaw at the London 

Monetarism Invades America 181 

School of Economics, and to Alfred Marshall at Cam- 
bridge. John Dewey, who moved from Chicago to 
Columbia University in 1913, called on Mitchell in that 
year to join him, and Mitchell finished his long career 

The fruits of Mitchell's work in Vienna appeared in 
1913, in the form of his first book, entitled Business 
Cycles. Based on the frog-pond monetary cycles theory 
of the Austrians, Mitchell's volume sought to prove 
that inflation and depression are "not disruptions . . . 
but fluctuations systematically generated by economic 
organization itself," as Mitchell's leading student and 
successor, Arthur F. Burns, commented. Mitchell piled 
up statistics covering the previous 100 years of Ameri- 
can "economic indicators." Not once did he mention 
that every American depression through the recently 
concluded Panic of 1907 was the direct and immediate 
result of contractions in loans available on the London 

The 1879 Specie Resumption Act had placed America 
in the same vulnerable position that followed the scut- 
tling of Nicholas Biddle's Second Bank of the United 
States in the 1830s. England still maintained the control 
over international trade financing that Ricardo and Sir 
Robert Peel had carved out during the first half of the 
nineteenth century. Even though America ran a surplus 
of exports to foreign countries over imports during 
every year since 1875, America's net liabilities to foreign 
countries — almost all to Britain — grew from $2.7 billion 
in 1897 to $3.9 billion in 1908. This sum, equal to three 
years' worth of imports at the time, was stupendous. 
The weak American money markets were dominated by 
the London-centered Morgan Bank, which pulled out 

182 The Ugly Truth About Milton Friedman 

liquid capital at every adverse turn of speculation in 
London. No single American economic crisis during 
the century analyzed by Mitchell was domestic in origin. 

The entire subject of "business cycle theory" is so 
replete with unabashed dishonesty that Mitchell's "sta- 
tistical work" recalls Jacques Rueffs warning about 
Hitler: "he turned a lie into a system of government." 

If Mitchell did not honestly analyze a single "trade 
cycle" in American history, he instigated plenty of 
them, including the 1929 crash. Mitchell's, set of "statis- 
tical indices" became the ruling economic theory at the 
just-created central bank, the Federal Reserve System. 
By Mitchell's methods, once the Federal Reserve deter- 
mined that a downtrend in trade was in store, the Fed 
tightened credit and forced a downturn in trade. The 
Aquarian Conspiracy calls this a "feedback mecha- 

As a graduate research assistant to Chicago Professor 
J. Laurence Laughlin, known as the detractor of Alex- 
ander Hamilton's central banking policies, Mitchell 
helped to draft the Report of the National Monetary 
Commission that subsequently became the Federal Re- 
serve Act of 1913. In 1909, Mitchell and Harvard 
Economics Professor Edwin Gay drew up plans for a 
national economic research institute as a counterpart to 
the proposed Fed System. Mitchell and Gay jumped 
into national prominence, however, only with the Au- 
gust 1917 American entry into World War I. On the 
advice of banker Paul Warburg, the "Father of the 
Federal Reserve," President Woodrow Wilson named 
Bernard Baruch to create a War Industries Board, with 
economic powers like those of the present Federal 
Emergency Management Agency. Baruch, a grandson 

Monetarism Invades America 183 

of B'nai B'rith founder Kuntner Baruch, was attorney 
for the Anglo-American financial firm of Guggenheim 
and a personal friend of Winston Churchill. The War 
Industries Board became the central planning agency 
for the wartime economy, allocating raw materials, 
machinery, and labor, and making or breaking great 
fortunes at will. 

Baruch appointed Gay the chief and Mitchell the 
deputy head of the War Industries Board's Division of 
Planning and Statistics. Within a short twenty years, the 
men of the University of Chicago had risen from the 
settlement houses of the Chicago stockyards to become 
the directors of national economic policy. The agents of 
the British Roundtable, which had first convened in 
1890 to protect the British Empire from the advancing 
industrial nations, were now in official control of Amer- 
ican economic policy. 

Mitchell's "new" statistical methods entered the gov- 
ernment, whence they have never left. Three days after 
the armistice, Baruch assigned Gay and Mitchell to 
continue their operation as the Central Bureau of Plan- 
ning and Statistics. Mitchell prepared all American 
statistics for the Versailles Treaty, including estimates 
for the reparations bill. 

In February 1920, Edwin Gay, Wesley Mitchell, and 
their entire wartime staff met in New York with partners 
of the Roundtable investment banks Lazard Freres and 
Kuhn Loeb. 19 The meeting produced the National 
Bureau of Economic Research, the privately controlled 
but quasi-official arbiter of economic statistics. Two 
Nobel Prize-winning economists have been prominently 
associated with the National Bureau. One is Milton 
Friedman, who joined its staff in 1946 while Wesley 

184 The Ugly Truth About Milton Friedman 

Mitchell was still research director. The other is Wassily 
Leontief. Mitchell and Gay personally brought Leontief 
from the University of Berlin to New York in 1931 to 
conduct the research on Gross National Product and 
input-output models, for which Leontief won the Swed- 
ish prize in 1973. 

Two features of this transaction are revealing. The 
first is Leontief s career itself. From the National Bu- 
reau, Leontief made his reputation as the chief statisti- 
cian of the Strategic Bombing Survey and provided the 
"evidence" that led Milton Friedman, Burton C. Klein, 
and other defenders of the Nazi system to conclude that 
Schacht was "too cautious." This scholarly atrocity 
heavily implicates chief economist Leontief. If that were 
not sufficient damnation, Leontief showed up on the 
podium of the inaugural press conference of the Initia- 
tives Committee on National Economic Planning, the 
proponent organization for "Fascism with a Demo- 
cratic Face." 

More interesting is the close relationship between 
Leontief s sponsor in New York, Wesley Mitchell, and 
his protector at Berlin, Werner Sombart. A close friend 
of Mitchell's, Sombart had virtually adopted Leontief 
when the young Russian was nineteen and persuaded 
him not to return to the Soviet Union. At Mitchell's 
request, Sombart dispatched Leontief to New York. 
Two years earlier, in 1929, Mitchell had published a 
glowing review of Sombart's treatise High Capitalism: 
"Sombart's work promises to stimulate further enquiry. 
That is the greatest service a scientific investigation can 
perform." 20 Mitchell won him honorary membership 
that year in the American Economic Association. 

Sombart had spent most of his career as a "Marxist" 

Monetarism Invades America 185 

opponent of the Austrian School. "Then," writes Lud- 
wig von Mises maliciously, "when the Nazis seized 
power, he crowned a literary career of forty-five years 
by a book on German Socialism [Deutscher Sozialismus, 
translated into English in 1937 as A New Social Philos- 
ophy]. The guiding idea of this work was that the Fuhrer 
gets his orders from God, the supreme Fuhrer of the 
Universe, and that Fiihrertum is a permanent revela- 
tion." 21 

The relationship of the National Bureau of Economic 
Research to Nazi fascism is, however, more tangible 
than a general agreement on so-called economic theory 
or mere personal associations. 

How Britain caused the crash 

The Mitchell "theory of business cycles" provided the 
Federal Reserve — Paul Warburg's institution — with the 
pretext for provoking such "cycles" through monetary 
action. The 1929 crash and the subsequent Great 
Depression were brought on by the Federal Reserve 
and the Bank of England's stated intent to create such 
a crash. 

The lobby for an American depression had been 
active for years before 1929. It opened for business in 
1923 when the National Bureau of Economic Research, 
under a commission from Secretary of Commerce Her- 
bert Hoover, issued Mitchell's Business Cycles and Un- 
employment. The report proposed the Viennese quack 
cure for "cycles": "To lessen the excesses of booms and 
the sufferings of depressions," wrote Mitchell, the Fed- 
eral Reserve must take "effective action . . . when indus- 

186 The Ugly Truth About MUton Friedman 

trial activity is approaching the elastic limit set by full 
use of existing plant, and when further expansion will 
be primarily a speculative boom ... it is desirable to 
raise discount rates in periods of sustained expansion." 22 

The type of long-term sustained growth the American 
economy had achieved could no longer take place under 
the regime the National Bureau prescribed for the 
Federal Reserve and Hoover. Noteworthy is that the 
main Wall Street proponent of Mitchell's understand- 
ably unpopular program was Paul Warburg, brother of 
Hjalmar Schacht's right-hand man Max Warburg, 
whose plans for the Federal Reserve had put J. Laurence 
Laughlin and Wesley Mitchell in business in the first 
place. 23 Almost alone among leading bankers, Warburg 
called for the Federal Reserve to crush the economy's 
expansion, claiming that it would "bring about a gen- 
eral depression involving the entire country." 24 

In Chicago, Economics Professor Henry Simons re- 
styled the Viennese proposal to eliminate credit expan- 
sion from the economy, in the form of "100 percent 
reserve banking." Simons "was my teacher and my 
friend," Milton Friedman told a 1967 memorial gath- 
ering for Simons at the University of Chicago, "and 
above all, a shaper of my ideas. . . . Mine would be very 
different than they are if I had not the good fortune to 
be exposed to Henry Simons." 25 Simons, like Mitchell, 
had done his graduate studies at the University of 

The results of Mitchell- Warburg- Simons agitation for a 
money crunch are a matter of record: We recall the 
floor of the New York Stock Exchange, October 24, 
1929. Clerks in shirtsleeves chalk up, rub out, and 

Monetarism Invades America 187 

frantically chalk up again prices that show that the 
market value of American industry has collapsed by 10 
percent over the morning. The ticker has fallen hope- 
lessly behind, as sell orders from across the country 
swamp the trading floor. Big blocks of equity find no 
buyers. A crowd has gathered outside the marble pillars 
of the Exchange. At the Morgan Bank on 23 Wall 
Street, New York's leading bankers devise secret, fruit- 
less plans to quench the panic. The Great Depression 
has begun. 26 

Overlooking the scene of chaos, in the visitors' gal- 
lery, stands a short, dog-faced man, who watches with 
a grim feeling of accomplishment. The enemy has been 
put to rout, he must have thought to himself. He wrote 
later: "The whole wealth so swiftly gathered in the prop- 
er values of previous years vanished. The prosperity of 
millions of Americans had grown upon a gigantic struc- 
ture of inflated credit, now suddenly proved phantom." 

The name of the watcher in the visitors' gallery was 
Winston Churchill. He had reason to gloat. 

Documents that prove that London had conspired to 
bring on the crash are in the public domain. An official 
Federal Reserve memo dated February 7, 1929, noted 
that the Bank of England demanded that American 
interest rates "be raised, at some unspecified time by a 
full one percent with a view to breaking the spirit of 
speculation, and then subsequently if necessary by an- 
other one percent, in order to provoke liquidation, and 
then after a fall in the stock market similar rate action 
at the first sign of the next revival. By thus prostrating 
the stock market ... we should be cutting at the root of 
the current situation." 

188 The Ug ly Tr uth Ab o ut Milton Friedman 

In a February 4, 1929, cable the Governor of the 
Bank of England, Montagu Norman, wrote: "A scram- 
ble for gold is threatened. This threat arises from credit 
position in the United States as shown particularly by 
abnormal Call and Time rates [short-term money rates] 
which appear to be due to Stock Exchange speculation. 
Therefore expectation is that Boston and/or Philadel- 
phia [Federal Reserve Banks] will recommend one per- 
cent increase in Bank Rate on 6th or 13th. . . . Further 
increases may follow if needed to adjust credit posi- 

That cable informed the Bank of England of Mon- 
tagu Norman's agreement with the New York Federal 
Reserve Bank to provoke a stock market crash. 

On Black Thursday, October 24, Montagu Norman 
cabled the New York Federal Reserve with congratula- 
tions — before the panic had actually occurred! "Recent 
liquidation in your stock market and reduction in call 
money rates have been satisfactory and have helped to 
reestablish international position." 

As the cited cables state, the Bank of England and 
the New York Federal Reserve conspired to put up 
interest rates and take related measures to choke off the 
flow of funds into the stock market. In September, the 
Bank of England raised its discount rate from 5.5 
percent to 6.5 percent in order to draw funds off from 
the New York market, while the Federal Bank of New 
York did as much as it dared to tighten credit at the 
source. Seventeen days before the crash, New York Fed 
President George L. Harrison bragged about the suc- 
cess of the credit squeeze: "The policy which we adopted 
early in August, of putting out funds through the bill 
market under the protection of an effective six percent 
rate, has thus far worked much better than I had even 

Monetarism Invades America 189 

dared hope. Bills [trade-related paper] have gone up, 
discounts [Fed issuance of direct credits to banks] have 
gone down, and the total volume of Federal Reserve 
credit has expanded only in proportion to the historic 
seasonal line. . . . We can continue this program so that 
the total volume of discounts in the system will gradu- 
ally decline to a figure much less than we have averaged 
during the past year." 

But as the crash demonstrated, further action was 
superfluous. The New York Fed, staffed by British 
collaborators from the Morgan bank and the Bank of 
England, had brought the roof down. 

These facts are well known and widely available. Also 
well known is that British banks began withdrawing 
immense amounts of funds from the New York money 
market, which had supported purchases of stocks on 
margin. Britain's pound sterling, bled white by the 
drain of international money into the New York stock 
market boom, had undergone a spectacular recovery on 
the markets in October 1929, before Black Thursday, as 
the City of London sucked in money in preparation for 
the crash! 

No one at the time of the crash doubted that the 
British had done it. As another vulture who descended 
on New York City to watch Black Thursday, London 
Economist editor Josiah Hirst, wrote later: "I recollect 
at a London gathering of economists early in 1929 a dis- 
cussion of the Stock Exchange boom in New York. . . . 
We all agreed, I think, that a slump or crash was then 
probable. The rise of the London Bank [of England] 
Rate to 6.5 percent on September 26 precipitated the 
Stock Exchange crisis and slump of October. Whether 
the action of the Bank [of England] in raising its rate 
was right or wrong need not be discussed here. . . . The 

190 The Ugly Truth About Milton Friedman 

mob of small speculators held on till the last moment, 
whereas many of the big speculators, being better 
informed and impressed by the veiling movements from 
London and the Continent, began to liquidate in Sep- 
tember and unloaded their holdings on the market, 
which was consequently weakened." 

In New York City, the financial page of the New 
York Times had been egging on the crash for months. 
In fact, by the time the panic struck, the Roundtable's 
New York Times had declared a half-dozen previous 
breaks in the market to be the Last Day for the hordes 
of sinning speculators. 

The United States did not have a depression because 
it had a stock market crash. It had a stock market crash 
because British control of the international markets 
created a depression. Above all, the financial policies of 
British Treasury Minister Winston Churchill wrecked 
the postwar prospect of an American-led boom in world 
trade. Churchill's tenure as Britain's Chancellor of the 
Exchequer from 1924 to 1929 shut American industry 
out of world markets. In a close parallel to the London 
Eurodollar cancer during the 1970s, London bled 
American capital to revive the bankrupt financial em- 
pire of the pound sterling, at the direct expense of 
American industry. American acquiescence in Winston 
Churchill's world looting plan passed a death sentence 
on the American economy, marked by the 1929 crash. 

From the disastrous 1919 Treaty of Versailles to the 
1931 collapse of the pound sterling itself, the bankrupt 
British provoked a series of economic disasters and 
extricated themselves from each by provoking a worse 
one. The irony of 1929 is that the great stock market 
boom was the runaway consequence of Winston 
Churchill's 1925 attempt to repeg world currencies to a 

Monetarism Invades America 191 

valueless pound backed only by borrowed American 
gold reserves. Once the City of London had transformed 
the world economy into a speculative madhouse, the 
world's free capital flooded into shares in American 
industry, the one viable sector of the international 
economy. When the flight into the New York stock 
market threatened to bring down the valueless pound, 
London decided to collapse the market. 

But the stock market crash set in motion the chain of 
events that led to the great chain-reaction bankruptcy 
of 1931 and brought down sterling. The City of London 
then played its last card: to place their agent Adolf 
Hitler at the head of Germany as a marcher-lord against 
the Soviet Union. London had already dug the 50 
million graves of the next war. 

That unspeakable string of British crimes is the hidden 
subject of the lies about the Great Crash. Canadian- 
born Professor John Kenneth Galbraith, an intimate of 
the Warburg banking family that played a key "insider" 
role in the crash itself, assembled the most widely read 
package of lies in his book The Great Crash. An 
outspoken apologist for Hitler's Economics Minister 
Hjalmar Schacht, Galbraith denies that the credit poli- 
cies of the Bank of England and their collaborators at 
the New York Fed created the mess: "Far more impor- 
tant than rate of interest and the supply of credit is the 
mood. Speculation on a large scale requires a pervasive 
sense of confidence and optimism that ordinary people 
were meant to be rich. . . . Sometime, sooner or later, 
confidence in the short-run reality of increasing com- 
mon stock values would weaken. When this happened, 
some people would sell, and this would destroy the 
reality of increasing values." 

192 The Ugly Truth About Milton Friedman 

That is, a burst of madness created the speculative 
wave, and the "ten good years of the Twenties had to 
be paid for by the ten bad ones of the Thirties." 

The other side of Galbraith's clipped coin is the lie 
that the American economy was already "naturally" 
slipping into depression and that the stock market crash 
only hastened the inevitable. The centerpiece of this lie, 
which is a favorite of British writers, is the claim that 
capital investment rose too fast: 

"Throughout the Twenties, production and produc- 
tivity per worker grew steadily: Between 1919 and 1929, 
output per worker in manufacturing industries in- 
creased by about 43 percent . . . costs fell, and with 
prices the same, profit increased. ... A large and in- 
creasing investment in capital goods was a principal 
device by which the profits were being spent." 

Therefore, "anything that interrupted the investment 
outlays — anything, indeed, which kept them from show- 
ing the necessary rate of increase — could cause trouble." 
In other words, the American economy collapsed be- 
cause it was successful, because it did not follow the 
contemporary British model of deindustrialization! The 
New Deal myth of the "Mature Society," the grand- 
daddy of all zero-growth, income redistribution pro- 
grams, found rationalization in this lie. 

But there is one significant kernel of truth to sustain 
the "over-investment" propaganda line. Between 1926 
and 1929, capital investment in American industry rose 
at a compound annual rate of 1 1 percent — several times 
higher than during the last decade to the present. After 
the crash and subsequent financial disasters, capital 
investment fell to virtually zero. The entire workforce of 
the capital goods industries found itself on the pave- 

Monetarism Invades America 193 

ment. These workers ceased buying consumer goods, 
which shut down production in much of the consumer 
goods industry. At the depth of the slump, industrial 
production had fallen a crushing 40 percent, total 
output of goods and services had halved, and unem- 
ployment was over 30 percent. 

An American System economy based on high rates 
of technological progress must either grow at an ac- 
celerating rate or dissipate its energies into collapse. 
There is no in-between. For this reason, the strongest 
economy of the 1920s had the farthest to fall during 
the 1930s. 

The supercilious Galbraith and his fellow liars dem- 
onstrate the opposite of what they intend: An American 
economy based on American System principles cannot 
exist in a world market ruled by Britain. There was not 
during the 1920s, nor can there ever be, a reconciliation 
between the American System and the British System. 
Once London chained the world economy to a system 
of war-debt repayment at Versailles, American industry 
was shut out from the world market. The decline of the 
world market ultimately prevented America from 
achieving the accelerating growth rate it had geared up 
for. London's domination of world financial policy 
created the theater for the sequence of British covert 
manipulation and haywire effects. 

In the economic data of the 1920s, all this is immedi- 
ately evident. Between 1921 and 1929, output of all 
industrial commodities for domestic consumption rose 
from $26 billion to $38 billion. As noted, capital invest- 
ment rose at rates that dwarf anything since 1958. A 
good pointer is auto production. At 5,358,000 in 1929, 
new-car registration had almost reached the level of the 

194 The Ugly Truth About Milton Friedman 

height of the post- Wo rid War II boom in 1953, when 
registration totaled 5,700,000. 

In complete variance, exports hardly rose at all. 
Foreign shipments stood at $3.3 billion in 1921, $3.7 
billion in 1926, and a marginally increased $3.9 billion 
in the year of the crash. As a percentage of output, 
exports actually fell from 12 percent to 10 percent. In 
lockstep, the rate of rise of production began falling in 
1926, from a 1921-1926 compound growth rate of over 
11 percent a year, to a 1926-1929 rate of only I percent 
a year! By the summer of 1929, a few months before the 
crash, all major categories of production and transpor- 
tation had already begun shrinking, a circumstance 
reported out of context by the lying proponents of 
"inevitable depression." 

What makes the stagnation of exports, which brought 
down the entire economy, especially shocking is that 
America was lending to foreign customers throughout 
the period at a rate greater than at the apex of the 1970s 
Eurodollar boom. In the six years from 1924 to 1930, 
America lent over $3 billion to foreign countries. For- 
eign lending reached the incredible rate of $1 billion a 
year during 1928 — at the precise point that exports 
started to fall. In the smaller scale of the 1920s, these 
numbers are indeed huge; total plant and equipment 
purchases during the period were only $17.3 billion. 

How could this have happened? 

The great betrayal 

American foreign lending did the American economy 
no good because nearly all foreign lending was either to 
the City of London or to investment sinkholes created 

Monetarism Invades America 195 

by the City of London. It happened that way because 
Thomas Lamont of Morgan and Benjamin Strong of 
the New York Federal Reserve conspired with Winston 
Churchill and Montagu Norman of the Bank of Eng- 
land to make sure it happened. Billions in American 
capital were put to the service of the bankrupt pound 
sterling, in order to restore its status as the top interna- 
tional lending currency — which Winston Churchill at- 
tempted in 1925. 

In a nutshell, the City of London blackmailed the 
world for the costs of servicing the monstrous war debt 
perpetuated by the British Roundtable's Versailles 
"peace" treaty in 1919. A single fact about the monetary 
system of the 1920s makes all the later disintegration 
obvious: Debt service payments on war obligations were 
roughly equal to all other loans extended to all foreign 
borrowers for all purposes! 

Of course, the relationship between the Versailles 
Treaty's war debts and the international lending during 
the 1920s was not direct in the sense that every dollar 
lent immediately went to service war debts. Nor could it 
have been: International trade would have ceased to 
exist. Instead, the debts contracted through the end of 
1919 were "restructured" into an even greater mass of 
longer-term obligations whose payment schedules 
stretched out through the next half-century, as shown 
by the table below (in billions of dollars). 

The bloated mass of debts cost almost $400 million a 
year to maintain, against a tough average of $600 
million a year in new loans. No wonder, then, that 
American exports stagnated. 

These numbers represent only the Allied interwar 
debt. Under British Roundtable progeny Lloyd 
George's slogan, "Squeeze Them Till the Pips Squeak," 

196 The Ugly Truth About Milton Friedman 


War debts 

War debts 


as of 1919 










the Roundtable's Versailles Treaty imposed $33 billion 
in reparations on defeated Germany. That was equiva- 
lent to Germany's total production in a good year. 

To nail the coffin lid shut, Montagu Norman and 
Benjamin Strong intentionally pricked the monetary 
bubble that had built up during the war years, throwing 
the United States into a brief but severe depression in 
1921. A fulminating Norman wrote to Strong, his 
agent-of-influence at the New York Federal Reserve 
who had engineered a credit crunch on Norman's 
orders, on the subject of the U.S. postwar economic 
boom: "We are determined to stop this mad march of 
speculation and expansion, whether it be in securities, 
real estate, commodities or what not. ... At last the 
first step has been taken towards freeing Federal Re- 
serve rate policy" for a deflationary coup. 

Norman's outburst was penned in January 1920. In 
December of that year, Benjamin Strong visited London 
and wrote back to his colleagues at the New York Fed 
that the Bank of England "considers that general rate 
policy has so far been wonderfully successful although 
the position here might be better today had they been 

Monetarism Invades America 197 

more drastic six months earlier. The fact remains that 
world deflation had been started." 

The conspirators had instigated a "wonderfully suc- 
cessful" act of economic sabotage against the American 
economy, which threatened to shove the bankrupt Brit- 
ish out of world trade. The effect was shattering. Prices 
in world trade fell to half their 1920 levels by 1922. In 
cold cash, that meant that the real cost of international 
debt service, in terms of deflated prices for goods, had 

With the United States in temporary decline, the 
British made their grand play at a meeting of world 
central bankers at Genoa in 1922. Previously, Norman 
said, central banks had held their reserves in gold. That 
would no longer do. Henceforward, only Britain and 
the United States will hold reserves in gold. Everyone 
else will hold their reserves in pound sterling, or perhaps 
dollars — but principally sterling. Norman was asking 
for the world. London had consciously and deliberately 
destroyed what might have remained of Britain's indus- 
trial markets after the war. America's emergence as the 
one sound postwar economy prevented London from 
skimming world trade off the top through financial 
control, as it had done since 1782. So Montagu Norman 
wanted the world's foreign exchange reserves! 

The Genoa meeting itself broke up without results, 
partly because President Harding's Treasury Secretary, 
Andrew Mellon, did not want to bail the British out, 
and put the anglophile Strong on a short leash. But two 
years later, Norman got precisely what he demanded on 
a silver platter, courtesy of the New York Federal 
Reserve and its backers at the Morgan Bank. 

By 1925, the Bank of England, the New York Fed, 

198 The Ugly Truth About Milton Friedman 

and the Morgan Bank had ridden over Europe like the 
Apocalyptic horsemen. German reparations were refi- 
nanced through a 900 million gold mark loan organized 
by the Morgan Bank, under the control of future U.S. 
ambassador to Britain Charles Dawes. The New York 
Federal Reserve's official historian wrote, "The vacuum 
left by the United States authorities was filled by J. P. 
Morgan and Co." Placed in charge, Hitler's future 
economic czar Hjalmar Schacht vigorously enforced the 
Dawes Loan provision that capital investment in the 
German economy cease. All of continental Europe, 
excepting France, was a protectorate of the Bank of 
England — directly in Central Europe, where Bank of 
England agents officially ran all central banking, and 
indirectly in Italy, where Winston Churchill's protege 
Mussolini had seized power in 1922. 

It fell to Chancellor of the Exchequer Churchill to 
announce the culmination of London's struggle to the 
top of the rubble heap. On April 1925, the dog-faced 
Churchill told the British Parliament that Britain had 
returned to the prewar gold standard, at the prewar 
parity of 4.85 pounds to the dollar. In fact, the rotten 
shell of the British currency was reinforced by hundreds 
of millions of dollars cheerfully provided by British 
agents-of-influence at the New York Fed and the Mor- 
gan Bank. 

The betrayal of the dollar to the bankrupt pound was 
comprehensive. For six months prior to Churchill's 
gleeful announcement, Strong at the New York Fed 
dropped the bank's discount rate from 4.5 to 3 percent, 
and increased the money supply in the New York 
Federal Reserve District at an annual rate that, in 
present-day terms, would be the equivalent of 40 percent 

Monetarism Invades America 199 

a year! With the dollar weakened by this hyperinflation- 
ary burst, sterling was sufficiently "strong" to repeg to 

Together, Morgan and the New York Fed jointly 
bankrolled the "gold pound." The Federal Reserve 
became a virtual branch of the Bank of England in a 
$200 million credit line for support of sterling. In turn, 
the Bank of England pledged an equivalent amount, 
two fifths of its own assets, to the New York Fed, and 
the two central banks agreed to subordinate all Ameri- 
can credit policy to the grand design of keeping the 
bankrupt pound afloat. Two weeks after the deed had 
been done, Churchill assured Parliament of a glorious 
pecuniary future for the Empire. 

On the contrary, the financial system immediately 
went haywire. 

Churchill's action was one of the most onerous in world 
financial history. Even the British Roundtable saw how 
shaky their position was. Their agent, John Maynard 
Keynes, immediately opened a new flank, denounced 
Churchill in a pamphlet, and joined Sir Oswald Mosley, 
protege of the Fabian Webbs and the future fiihrer of 
the British Union of Fascists. Working with Mosley, 
Keynes wrote the prototype fascist economic program 
in 1926, the forerunner of Schacht's "autarky" — which 
Keynes would also enthusiastically support. 

From the psychotic vantage point of a Churchill or 
Norman, there was one great monkey-wrench in the 
works: the still-prosperous United States economy. The 
City of London had almost no funds of its own. It 
depended on loans from New York, which it converted 
into sterling and re-lent to Germany, Central Europe, 

200 The Ugly Truth About Milton Friedman 

and Australia. After great bursts of lending in 1924 and 
1925, American capital suddenly became obstinate. 
During 1926 it flooded into the New York stock market 
and ignored London. Sterling tottered. Churchill had 
fits of apoplexy. 

In panic, Schacht and Norman arrived in New York 
in July 1927 to persuade Strong to shovel more money 
into the system and save sterling. Strong — despite ve- 
hement opposition from the Chicago Federal Reserve 
Bank and the threat of congressional investigation — cut 
his lending rate from 4 percent to 3.5 percent, and 
bought dollar and sterling securities alike to pump 
money into the system. 

Strong's second great dose of monetary inflation had 
horrible side effects. Initially, it revived the outflow of 
funds — Britain's looting of American capital — to a then 
stupendous level of over $1 billion during 1928. But it 
also set off a modest bubble in the New York Stock 
Exchange, whose shares doubled in value between the 
beginning of 1928 and the crash of October 24, 1929. 
Relative to American industrial strength and the size of 
the American economy, the sudden takeoff in share 
values was less than a mortal problem. Britain had 
turned the world into a roulette table, and America was 
the only confidence-inspiring game in town. Funds 
pouring in from abroad buoyed the market, and the 
drain pushed sterling to the brink. As reported above, 
the City of London had resolved to kill the stock market 
by the beginning of 1929 at the very latest. 

Norman's October 24, 1929 boast that the crash had 
"helped to reestablish Britain's international position" 
meant, specifically, that the American capital markets 
were Britain's for the picking once again. The American 

Monetarism Invades America 201 

securities markets did not collapse immediately after 
Black Thursday. On the contrary, Morgan and its allies 
raised a then record $700 million in foreign loans during 
the first half of 1930. 

What had collapsed was American industry's fighting 
spirit. Three years of stagnating production and exports 
had taken their toll on America's capacity to sustain the 
necessary rising rate of productive investment. The 
crash killed it. Britain's black operation created panic, 
which had its own self-feeding effects. Chief among 
these was the mammoth error of the Hawley-Smoot 
protective tariff, passed with the support of American 
industrialists and farmers who despaired of access to 
world markets. 

In an act of supreme irresponsibility, the City of 
London had wrung the neck of the Golden Goose. The 
collapse of the American economy, the one pillar of 
world economic activity during the 1920s, brought 
world disaster. World trade closed down, prices fell by 
1931 to half their 1929 levels, and the big borrowers of 
the 1920s defaulted in a chain reaction. 

Britain itself was nonplussed, shifting the worst of the 
30 percent collapse of sterling's international parity 
onto its colonies, the price of whose raw material 
shipments to Britain had dropped 60 percent. The Hitler 
policy was in the works as far back as 1928, when 
Norman spoke of Germany to a financial friend, 'There 
will be no real settlement without a crisis — real and 
sufficiently real to frighten politicians and public." 

The line of investigation opened in the first chapter 
citing Jacques Rueff s report that Anglo-American fi- 
nanciers had delivered Germany into Hjalmar Schacht's 
hands, now comes full circle. After the July 1931 

202 The Ugly Truth About Milton Friedman 

collapse of the Austrian Kreditanstalt, a chain-reaction 
of banking collapses swept Europe. Germany, laboring 
under the immense burden of Allied reparations de- 
mands, faced national disaster after Paul Warburg, 
chairman of the International Acceptance Bank, vetoed 
the proposal among a syndicate of Germany's private 
creditors to provide an emergency short-term loan. 
Rueff, then financial attache to the French embassy in 
London, was a witness to the set-up of Schacht's policy. 
"The governments reacted as they always do in 'such 
cases; they called an international conference," Rueff 
reported, "which met in London during the holiday 
period." 27 Over French objections, the British and 
American delegations decided that "the threat hanging 
over the German currency is due to the flight of short- 
term capital invested in Germany in the face of a 
potential new inflation. Since it is the outflow of such 
capital that endangers German currency, there is only 
one solution, which is to tie it up in Germany, or, in 
other words, to prevent it from leaving the mark 
area." 28 As we noted earlier, the London conference 
imposed the Schachtian controls system on Germany. 
"When Hitler assumed power he found already estab- 
lished the system that would enable his regime to 
function and endure," Rueff concluded. 29 

The Viennese economists were filled with ghoulish glee 
over the collapse of the world's financial system. Fried- 
rich von Hayek lied: "There is no reason to assume that 
the crisis was started by a deliberate deflationary action 
on the part of the monetary authorities, or that the 
deflation itself is anything but a process induced by the 
maladjustments of industry left over from the boom." 30 

Monetarism Invades America 203 

Unlike von Hayek, Friedman — perversely — admits 
that "the severity of each of the major contractions — 
1920-21, 1929-33, and 1937-38— is directly attributable 
to acts of commission and omission by the Reserve 
authorities." 31 Friedman says this in order to promote 
his own variant of the old von Mises-Henry Simons 
plan to eliminate the extension of credit in the national 
economy. Friedman's famous proposal is to "drastically 
curtail the discretionary power of the monetary author- 
ities," in favor of "a legislated rule instructing the 
monetary authority to achieve a specified rate of growth 
in the stock of money. ... I would specify that the 
Reserve System shall see to it that the total stock of 
money so defined rises month by month, and indeed, so 
far as possible, day by day, at an annual rate of X 
percent, where X is some number between 3 and 5." 32 

The choice Friedman presents is between a central 
bank that deliberately undercuts economic growth, and 
a "legislated rule" that would prevent economic growth 
altogether. This idea is to be taken no more seriously 
than his suggestion to cut the federal budget outright 
by $100 billion. It is a form of Deweyan operant condi- 
tioning aimed at hardening the "molds of economic 
rationality" discussed by Friedman's teacher Wesley 

Friedman's "analysis" of the post-1929 misery of the 
American economy is a laughingstock, even at the 
National Bureau of Economic Research. Friedman's 
contention is the following: "All told, from July 1929 to 
March 1933, the money stock in the United States fell 
by one-third, and over two-thirds of the decline came 
from England's departure [in 1931] from the gold 
standard. Had the money stock been kept from declin- 

204 The Ugly Truth About Milton Friedman 

ing, as it clearly could and should have been, the 
contraction would have been both shorter and far 
milder. It might have still been relatively severe by 
historical standards. But it is literally inconceivable that 
money income could have declined by over one-half and 
prices by over one-third in the course of four years if 
there had been no decline in the stock of money." 33 

The directors of the National Bureau of Economic 
Research felt constrained to write an appendix to Fried- 
man's Monetary History of the United States, which the 
Bureau itself published, explaining the idiocy of Fried- 
man's "underlying assumption." 34 Written by National 
Bureau director and Lazard Freres partner Albert J. 
Hettinger, Jr., the appendix points out that the Federal 
Reserve cannot simply increase the money supply in a 
general banking panic. "This is not a controlled experi- 
ment," Hettinger admonished Friedman, "with high- 
powered money held constant. Depositors were watch- 
ing their banks. . . . With respect to the final statement 
that the [1931] collapse of the monetary system was 
unnecessary, this I cannot feel has been proved." 35 

Hettinger's argument is that once a worldwide panic 
was in full tilt, it was not the Federal Reserve's prerog- 
ative to prevent a decline in the money supply. Black 
Thursday unleashed a series of uncontrollable conse- 
quences, uncontrollable even from the vantage point of 
the men who touched off the 1929 collapse. Albert 
Hettinger quotes Lord Keynes in 1931: "Nothing is 
more suicidal than a rational investment policy in an 
irrational world." 36 Milton Friedman's own worm's-eye 
view of the matter was incompetent in the opinion of 
the National Bureau directors. 

Monetarism Invades America 205 

We know with hindsight that the least manageable of 
the consequences of the 1929 crash was Adolf Hitler. 
The Austrian corporal took his race theory from John 
Ruskin and Houston Stewart Chamberlain, his geopol- 
itical theories from Sir Halford Mackinder and Colonel 
Haushofer, his exotic mysticism from the Oxford cul- 
tists, and his economics from Hjalmar Schacht. Even 
the swastika symbol was a favorite of the British kooks 
before Hitler was born; a hooked cross is carved into 
the stone of Ruskin's tomb at Oxford, and Rudyard 
Kipling had it engraved on the frontispieces of his first 
books. 37 The historian is at a loss to discover any 
innovations beyond the quirks of nineteenth-century 
Oxford and Vienna in later Nazi activities. Carol White 
has shown why Hitler, British product though he was, 
did not fulfill the British geopolitical aim of marching 
east against the "heartland" instead of west. 38 Although 
British sympathies for Hitler persisted almost until the 
fall of Prime Minister Neville Chamberlain (a relative 
of Houston Stewart Chamberlain), the split between Dr. 
Frankenstein — London — and his monster — Nazi Ger- 
many — is dated more or less officially from Schacht's 
1938 break with Hitler. 

In understanding the relationship between Nazi fas- 
cism and its creators, it is important to understand that 
fascism did not begin with Hitler or Mussolini, and did 
not end with them. The afterbirth of Nazism has never 
been cleaned up. The central European and British 
nobility who sponsored Adolf Hitler from his Vienna 
days onward reorganized themselves during the 1930s 
into a new international body, perpetuating the cult and 
policy features of Nazism into another generation. It is 

206 The Ugly Truth About Milton Friedman 

certain that in a better-ordered world, some of the 
Allied victors would have been in the Nuremberg dock 
with Goring and Speer. 

One of the unsettling ironies in the entire business is 
that the child of impoverished Jewish emigrants to the 
United States, Milton Friedman, turned up like a 
foundling on the doorstep of the Nazi economists. 

Undead of 


It is science and not men of science we want to 
enlighten and animate our politics and rule the 

— H. G. Wells 

Without exception, the history of ideas drags up more 
skulduggery, plots, cloak-and-dagger operations, and 
so forth than comparatively tame subjects like espio- 
nage. As we proceed to uncover the more recent history 
of the Vienna cult of irrationalism, and in particular, 
the activities of the semisecret organization known as 
the Mont Pelerin Society, some well-known occult 
novels will seem more biographical than fictional. Cen- 
tral are the figures of Count Coudenhove-Kalergi and 
his successor as chairman of the Pan-European Union, 
Otto von Hapsburg, the pretender to the defunct crown 
of Austria. Hapsburg, whose shadowy existence has 
taken him from the Madrid terror networks of the old 
SS commando Otto von Skorzeny to the side of West 
Germany's Franz- Josef Strauss, deserves more recogni- 

208 The Ugly Truth About Milton Friedman 

tion among American conservatives than he currently 
enjoys: it is his web of regrouped aristocrats that 
controls Milton Friedman, vice-president of the Mont 
Pelerin Society. 

Coudenhove-Kalergi and his protege von Hapsburg 
are the tangible, living connection between the Vienna 
of Hitler's painter days under the reign of Wittelsbach 
Empress Elizabeth, and the "free enterprise" phalanx of 
idea factories that employs Milton Friedman as chief 
publications man. The pseudopods of Nazi economics 
at the University of Chicago, Columbia, and elsewhere 
ensured the direct continuity of the strain: John Dewey 
and his friends brought von Mises and von Hayek to 
the United States. After World War II, the members of 
the old Vienna web reconvened at Mont Pelerin in 
Switzerland, where they launched the campaign to take 
America, a campaign that may now be on the verge of 
final victory. 

Never mentioned in the newspapers, and cited only in 
hushed tones by its own members, the Mont Pelerin 
Society wields sovereign power over the right wing of 
American politics. Every loudspeaker through which 
Milton Friedman's voice filters is wired back into the 
Society's European headquarters, directed by its secre- 
tary, Max von Thurn und Taxis of the centuries-old 
Hapsburg-related family, and by its president, Friedrich 
von Hayek. Along with von Hayek, Archduke Otto von 
Hapsburg directs the Society's German-speaking 

At any given political function in the United States 
on behalf of "free market" economics or "sound 
money" principles, one of the hundred or so American 
members of the Society is usually featured as a speaker. 
When asked about the Mont Pelerin Society, the indi- 

The Undead of Economics 209 

vidual concerned will say that he is indeed a member of 
an innocuous organization of that name, whose only 
function is to serve as a forum for the discussion of 
liberal economics — the way Murder, Inc. was a florist's 
delivery service, Pressed, the individual will invariably 
back off, saying that he cannot discuss the Society's 
activities with nonmembers. How does one join the 
Society? "Membership is by invitation only." 

The Mont Pelerin Society's American operatives infil- 
trate every institution that professes conservative ideol- 
ogy. They include Milton Friedman and George Stigler 
of the University of Chicago, vice-president and presi- 
dent, respectively, of the Society; Hoover Institution 
director Glenn Campbell and Hoover economist Martin 
Anderson, both advisers to Ronald Reagan; Barron's 
Magazine editor Robert M. Bleiberg; National Review 
editor William F. Buckley, Jr.; National Committee on 
Monetary Reform president Donald Kemmerer and 
board member John Exter; former U.S. attorney general 
and Chicago professor Edward H. Levi; Wall Street 
Journal columnist Edwin McDowell; Heritage Founda- 
tion director Edwin J. Feulner, Jr.; and American 
Enterprise Institute president William J. Baroody, Sr. 1 

That these ideological ghouls are walking around in 
leading positions in American political life is like some- 
thing out of a cheap horror movie. Whatever was most 
rotten in the irrationalist, zero-growth, racist circles in 
Vienna at the turn of the century re-formed itself in 
exile as the Mont Pelerin Society in 1947. 

Count Richard Coudenhove-Kalergi, named after fam- 
ily friend Richard Wagner, is the subject of thick 
dossiers at every police headquarters in Europe. He was 
the son of an Austrian diplomat who was an intimate 

210 The Ugly Truth About Milton Friedman 

friend of such Vienna luminaries as Richard Wagner, 
Theodore Herzl, and race ideologue Houston Stewart 
Chamberlain, whom the Count described in his memoirs 
as "a friendly old intellectual." 2 

Particularly after the Second World War, his name 
and organization, the Pan-European Union, have been 
linked to the terrorist network known as "Die Spinne" 
(the Spider), or the "Black International. " One facet of 
the Black International is the international assassination 
bureau called Permindex, which was cited for involve- 
ment in the assassination of John Kennedy. 

To the extent that the Vienna kooks and their allies in 
Germany maintained an open political front-organiza- 
tion, it was the Pan-European Union, which Couden- 
hove-Kalergi founded in 1924. The objectives of this 
organization had nothing to do with what is now the 
European Community, the organization of European 
unity that flowered under French President de Gaulle 
and West German Chancellor Adenauer, and that flour- 
ishes now under President Valery Giscard d'Estaing and 
Chancellor Helmut Schmidt. The objectives of the Pan- 
European Union were, simply, to revive the Austro- 
Hungarian Empire and restore feudal Europe. Otto von 
Hapsburg was barred from West German parliamentary 
elections in 1979 because he holds these views, deemed 
correctly by the West German government as "anti- 

Coudenhove-Kalergi reports the founding of the Pan- 
European Union straightforwardly in his memoirs: 

"At the beginning of 1924, we received a call from 
Baron Louis Rothschild: one of his friends, Max War- 
burg from Hamburg, had read my book and wanted to 
get to know us. To my great surprise, Warburg sponta- 

The Undead of Economics 211 

neously offered us 60,000 gold marks, to tide the 
movement over for its first three years. I suggested to 
him that we spend half of it in Austria, and half in 
Germany . . . Max Warburg, who was one of the most 
distinguished and wisest men that I have ever come into 
contact with, had a principle of financing these move- 
ments. ... He remained a convinced Pan European for 
his entire life, and we were bound by a warm friendship 
up until his death in 1946." 

Later that year, Coudenhove-Kalergi went to Berlin, 
where "Hjalmar Schacht was the main speaker at the 
first German Pan-European meeting in the Reichstag 
building." Schacht and Max Warburg were president 
and vice-president of the Hitler Reichsbank together 
until 1938. 

Touring Europe, Coudenhove-Kalergi enunciated the 
viewpoint that has since borne the label "One- World- 
ism." He argued that the League of Nations should rule 
and secure British interests against both fledgling super- 
powers, the United States and the Soviet Union. 

"The rapprochement of the British Empire," he 
wrote, "as a section of the League of Nations, would 
strengthen its firm ties, and a united continent, in 
closest association with England . . . could prevent a 
world hegemonic Russia or America, [and] would set 
up a world balance of powers under the control of the 
League of Nations." The League was then run by Sir 
Robert Cecil, whose own man, Winston Churchill, 
became a fervent supporter of the Pan-European 
Union. 3 

Max Warburg, Coudenhove-Kalergi reports, ar- 
ranged his 1925 trip to the United States. There to 
receive him in America were Max's brother Paul War- 

212 The Ugly Truth About Milton Friedman 

burg and financier Bernard Baruch, the patrons of 
Wesley Clair Mitchell's National Bureau of Economic 
Research. Coudenhove-Kalergi was introduced to the 
entire anglophile banking elite, including Owen Young, 
author of the Young plan to refinance World War I 
reparations; Commerce Secretary Herbert Hoover; and 
Woodrow Wilson's eminense grise, Colonel House. At 
the conclusion of his trip, Coudenhove-Kalergi founded 
the American Cooperative Committee of the' Pan-Eu- 
ropean Union, under the chairmanship of Columbia 
University President Nicholas Murray Butler, also pres- 
ident of the Carnegie Foundation. Butler is the man 
who had told his students that totalitarian regimes 
brought forth "men of far greater intelligence, far 
stronger character, and far more courage than the 
system of elections." Earlier he had brought Chicago's 
John Dewey and Wesley Mitchell to Columbia. 

Throughout the 1920s, Coudenhove-Kalergi resided 
in Switzerland to savor "the eternal Europe of the 
peasantry as a great cultural entity along the side of the 
thin and transient veneer of urban art." In effect, the 
Pan-European Union operated at the behest of the 
British Empire, as Coudenhove-Kalergi had told Chur- 
chill and other British leaders in 1925. 

The Pan-European Union, more than any other or- 
ganization, legitimized the Hitler coup d'&at in 1933. 
With the British leaders, the Pan-European Union 
believed that "Hitler will bring about Pan-Europa — 
Hitler alone can create Pan-Europa, because he alone 
does not have to fear any right-wing opposition," as 
Coudenhove-Kalergi quoted Hjalmar Schacht's briefing 
to him in January 1933. Schacht added: "Hitler alone 
doesn't have to have any consideration for this opposi- 

The Undead of Economics 213 

tion; therefore he, and he alone, will succeed in finally 
guaranteeing Europe's peace and cooperation." 

A few days later, Coudenhove-Kalergi met in Vienna 
with Colonel Karl Haushofer, the Bavarian student of 
British geopolitician Halford Mackinder and the man 
who had ghostwritten Mein Kampf ten years earlier. 
Haushofer, whose Zeitschrift fur Geopolitik "always 
had a friendly word for Pan-Europa," the Count re- 
called, "described Hitler, whom he personally knew, as 
a typically half-educated person. But on the other hand, 
Haushofer spoke in a very friendly fashion about Ru- 
dolf Hess." 

The same March, Coudenhove-Kalergi met Musso- 
lini. His interchange with the Italian fascist dictator is 
published in the Count's own memoirs: "The idea of 
fascism traced itself back to Nietzsche's anti-democratic 
philosophy, just as Hitler's dreams went back not in the 
least to the romanticism of Wagner's operas. I remarked 
that Nietzsche was a predecessor of the Pan-European 
Movement, and I gave him the publication Paneuropa, 
with a complete collection of Nietzsche's writings on 
the United States of Europe." The meeting with Mus- 
solini lasted several days. 

The Pan-European Union's mission, however, was 
not to join Hitler, but to maintain the international 
climate in which Hitler would be tolerated, Couden- 
hove-Kalergi settled on Austrian fascist Engelberg 
Dollfuss, then the honorary president of the Pan-Euro- 
pean Union in Austria, and took up residence in Vienna. 
Hitler murdered Dollfuss after the 1938 Anschluss with 
Austria, and Coudenhove-Kalergi fled to England and 
to the open arms of Winston Churchill. 

As the events of 1938 showed, Hjalmar Schacht had 

214 The Ugly Truth About Milton Friedman 

erred in his original estimation of Hitler. A Franken- 
stein monster, Hitler — and his generals — could not be 
made to strike only east at Russia. To the British 
leadership, this was not obvious until Hitler and Goring 
threw Schacht and Max Warburg out of the Reichs- 
bank. Even then Prime Minister Chamberlain backed 
Hitler at Munich. Quietly, however, the leading cadre 
of Pan-Europe packed their coffins and moved to the 
safety of England and America, their mission in Ger- 
man-speaking Europe complete. 

The march west 

The migration of the Vienna School was far more than 
a matter of convenience. Britain's elite was determined 
to realize Coudenhove-Kalergi's objectives in the war 
of ideas. Coudenhove-Kalergi's close friend in England, 
H. G. Wells, expostulated before an Oxford University 
audience in 1932, "I am asking for a liberal Fascisti, for 
enlightened Nazis. I am proposing that you consider 
the formation of a greater Communist Party, a Western 
response to Russia.'* 4 

Coudenhove-Kalergi, on the European side, and John 
Dewey, on the American side, proceeded to select which 
European scholars and scientists would survive the Nazi 
holocaust. Coudenhove-Kalergi's close associate, Hun- 
garian physicist Leo Szilard, had already moved to 
Switzerland to be with Coudenhove-Kalergi in 1932, 
after a decade of organizing for the Pan-European 
Union in Budapest. In 1932, Szilard began to move the 
Pan-European Union's treasury into Switzerland, out of 
sensitive Germany. A few days after the Reichstag fire, 

The Undead of Economics 215 

Szilard, an official of the Christian Social Party of 
Austria named Gottfried Kuhnwald, and British econ- 
omist Sir William Beveridge — a classmate of von Mises 
and von Hayek — met in Vienna to plan the exodus. 

Sir William Beveridge returned to England to form 
the Academic Assistance Council, and Szilard created 
the Society to Aid German Scientists Abroad in Zurich. 
At Columbia University, at the prompting of Columbia 
University President Nicholas Murray Butler, John 
Dewey and Wesley Clair Mitchell formed the Columbia 
Faculty Fellowship Fund, which later brought Szilard 
himself to Columbia. The center of the effort was the 
recruitment of German scientific personnel, in anticipa- 
tion of the requirements of the Manhattan Project. In 
charge of scientific recruitment was Thorstein Veblen's 
brother Oswald Veblen, who wrote in May 1933: "The 
idea which seems to receive most favor is that of having 
a committee for the natural scientists, which should be 
composed in large part of what the Germans would call 
aryan scientists, together with a few men of affairs who 
would know how to raise funds. The idea would be to 
distribute the German scientists ... to allow them to 
continue their scientific work." 5 

As a matter of expedience, the Dewey- Veblen recruit- 
ment campaign brought to America some of the best of 
European scientists of the tradition of Bernhard Rie- 
mann and the Leibnizian Gottingen University. The 
success of the Manhattan Project and related Allied 
scientific ventures owes much to these Europeans. How- 
ever, the migration of these gifted men took place under 
the political oversight of the Viennese irrationalists and 
their Oxford-Cambridge opposite numbers. In one of 
the more poignant ironies of the period, the great 

21 6 The Ugly Truth About Milton Friedman 

Gottingen mathematician Richard Courant wound up 
at New York University — creating a powerful scientific 
faculty there for the first time — along with Count 
Richard Coudehove-Kalergi and his aide-de-camp, Vi- 
enna school economist Ludwig von Mises. 

Von Mises, one of the house economists of the 
Hapsburg family before the First World War, rose in 
exile to membership on the Council of the Pan-Euro- 
pean Union and, with Coudenhove-Kalergi, created the 
Research Seminar for European Federation at New 
York University. Again, Coudenhove-Kalergi's appear- 
ance at New York University was due to the financial 
support of John Dewey's U.S. Emergency Committee 
in Aid of Displaced Foreign Scholars, and the personal 
influence of Dewey's sponsor, Columbia president But- 
ler. Von Mises' s Viennese twin, Friedrich von Hayek, 
was meanwhile ensconced at the London School of 
Economics — writing justifications for letting the Great 
Depression ravage its course without interference. 

Not the least benefit the British oligarchy had from 
Hitler was sudden, life-and-death rule over most of 
European continental science. Sixty years earlier, the 
mindless physics of Ernst Mach and the economic 
theories of Karl von Menger and W. S. Jevons had been 
an occult challenge to the achievements of American 
and German political economy, and to the scientific 
conquests of Bernhard Riemann and his Gottingen 
colleagues. Oxford and Vienna began the fight as raving 
medievalists, demanding the reversal of human progress 
since the Golden Renaissance. Now, anchored at the 
University of Chicago in America and at Oxford and 
Cambridge in England, the kooks were in position for 

The Undead of Economics 217 

the first time to dictate the terms of thought to the 
English-speaking world. 

They made their official bid for world status in 1935 
at the Seventh International Congress of Philosophy at 
Oxford, in the presence of Ludwig von Mises, Bertrand 
Russell, and the philosophical adherents of mad old 
Ernst Mach — future Mont Pelerin Society founder Karl 
Popper and Rudolf Carnap from Vienna. They heralded 
a "new era in philosophy," in fact, the superimposition 
of the old Vienna outrage against the notion of causality 
on reluctant Western minds. What became known as 
the "logical positivist movement," with early fortified 
positions at the University of Chicago and Columbia, 
was born there. 

The various economists, physicists, mathematicians, 
and philosophers who made up the movement merely 
elaborated on what Mach and kook economist Karl 
von Menger had said half a century earlier: The human 
race must remain a spectator in nature, not the active 
shaper of nature. The Viennese and Oxford economists 
insisted that all wealth was fixed by nature, and that 
what man arrogantly calls production merely "alters 
the position in space" of this fixed wealth — a lie that 
dates back to Aristotle's Politics. Ernst Mach and the 
Viennese science mafia insisted that since there is no 
correspondence between the workings of the human 
mind and the laws of physical nature, man is condemned 
to stand forever bewildered and uncertain before the old 
pagan gods. 

With the convening of the International Congress for 
Unity of Science in 1935, organized by Dewey and 
Russell, the Vienna ideologues acted like an amoeba, 
sucking in and nullifying opposing viewpoints. In 1938, 

218 The Ugly Truth About Milton Friedman 

at Dewey's University of Chicago, "boy wonder" pres- 
ident Robert Hutchins published the International En- 
cyclopedia of Unified Sciences, under the direction of 
newly migrated Viennese Rudolf Carnap. The introduc- 
tory article was written jointly by Russell, Dewey, and 
Carnap, restating a program of action set forth by 
Russell's collaborator H. G. Wells ten years earlier: 

"I want to suggest that something, a new social 
organization, a new institution — which for a time I shall 
call World Encyclopedia. This World Encyclopedia 
would be the mental background of every intelligent 
man in the world. Such an Encyclopedia would play the 
role of an undogmatic Bible to world culture. It would 
do just what our scattered and disoriented intellectual 
organizations of today fall short of doing. It would hold 
the world together mentally. It would compel men to 
come to terms with one another. It is a super university 
I am thinking of, a World Brain, no less. Ultimately if 
our dream is realized it must exert a very great influence 
upon everyone who controls administrations, makes 
wars, directs mass behavior, feeds, moves, starves and 
kills populations. . . . You see how such an Encyclope- 
dia organization could spread like a nervous network, a 
system of mental control, knitting a system of mental 
control about the globe, knitting all the intellectual 
workers of the world through a common interest and 
common medium of expression." 6 

That was in 1928. Russell, then preparing the 1935 
Oxford conference mentioned above, wrote Wells, "I do 
not know anything with which I agree more entirely." 7 
From his eyrie in Switzerland, Count Coudenhove- 
Kalergi dispatched Leo Szilard to London to obtain the 
Central European translation rights to Wells's work. 8 

The Undead of Economics 219 

Surveying the ruins of American intellectual life, it 
must be concluded that Wells's 1928 project, realized in 
the 1938 International Encyclopedia of Unified Science 
at the University of Chicago, was a devastating success. 
Published wriile Milton Friedman was a young Chicago 
graduate student, the Encyclopedia filled Wells's recom- 
mendation to the letter and "spread like a nervous 
network, a system of mental control about the globe." 

There is no need at this point to review the conclu- 
sions of the project; we reviewed them in detail in the 
first chapter, citing Milton Friedman's call-to-arms, 
"The Methodology of Positive Economics." In that 
essay, Friedman insisted that "the relation between the 
significance of a theory and the 'realism' of its 'assump- 
tions' is almost the opposite of that suggested by the 
view under criticism. Truly important and significant 
hypotheses will be found to have assumptions that are 
wildly inaccurate descriptive representations of reality, 
and, in general, the more significant the theory, the 
more unrealistic the assumptions." 9 

Friedman put in brash, blunt, American language the 
kernel of the Viennese method — which the Viennese 
themselves would have stated in less jarring and less 
comprehensible language. The great enemy of this 
theory of nonthinking is the principle of causality, the 
notion that the human mind can know the workings of 
the physical universe and act upon them. The conclu- 
sions of the Viennese assault are obvious: Man cannot 
intervene in nature to build industrial republics because 
wealth is fixed by nature and the workings of the 
economy are unknowable; science cannot penetrate 
further than it already has in the physical sciences 
because of the "uncertainty principle"; the human race 

220 The Ugly Truth About Milton Friedman 

is fixed in declining circumstances and subject to "limits 
to growth." That is what Milton Friedman says. All his 
blather about "free markets," "limited government," 
and "individual liberty" is by way of convincing the 
unwary reader to accept these limits. 

Between Wells's 1928 proclamation for "universal 
mind control" and the first publication of the Chicago- 
based Encyclopedia, the Anglo- Viennese kooks carried 
out — among other things — the objectives for "economic 
science" set forth by Wesley Clair Mitchell and John 
Dewey at the turn of the century. As we reported, 
Mitchell complained that a mass of individuals acting 
on the motivations of Jeremy Bentham's pleasure-pain 
principle would be an irrational, incoherent, jarring 
mass. The solution to this problem Mitchell found in 
Dewey's "social psychology" or what Wells more 
bluntly called "mind control": imposing what Mitchell 
said was a "rational theory of economic life." As we 
quoted Mitchell earlier, "Because it thus rationalizes 
economic life itself, the use of money lays the founda- 
tion for a rational theory of that life." 10 

Friedman's monetary theory and the Machian Ency- 
clopedia project were spawned as twins at the University 
of Chicago, from the intermingling of John Dewey's 
"social psychologists" and the Austrian mental storm- 
troopers shipped to the United States by Coudenhove- 
Kalergi. Of course, between Wells's initial statement of 
objectives and the appearance of the Encyclopedia's first 
volume and Friedman's first essays, the talk of "mind 
control" attenuated, and Wells himself remained in the 
background. Wells wanted it that way. His "system of 
mental control" was to act subtly, "informing without 
pressure or propaganda, directing without tyranny." 11 

The Vndead of Economics 221 

Today Wells's 1928 call is praised by the avant-garde of 
America's would-be mind controllers as their founding 
document. In The Aquarian Conspiracy, which presents 
the blueprint for reducing America to a gigantic drug 
commune, author Marilyn Ferguson hails Wells's 1928 
document as the origin of the "conspiracy*': 

"In The Open Conspiracy: Blueprints for a World 
Revolution, novelist-historian H. G. Wells proposed that 
the time was nearly ripe for the coalescence of small 
groups into a flexible network that could spawn global 
change." 12 

To trace through every rivulet of irrationality pro- 
ceeding from the "Unified Sciences" conspiracy would 
require a book in itself. Here, we center attention on 
one of them: the Mont Pelerin Society, founded by 
Friedrich von Hayek and Ludwig von Mises in 1947. 

Mont Pelerin and the road to fascism 

Von Hayek wrote the Mont Pelerin Society's founding 
document, The Road to Serfdom, in London in 1943. 
The title contains an inside joke: On the surface, von 
Hayek oozed the same concern for "individual liberty" 
against the "tyranny of the state" that Friedman bores 
us with in Capitalism and Freedom. However, his con- 
clusions and policy recommendations evoke the serfdom 
of feudal Europe, the "eternal Europe of the peasantry" 
that his friend Coudenhove-Kalergi had extolled from 
his Swiss manor. 

"We shall not rebuild civilization on the large scale," 
wrote von Hayek of postwar objectives. "It is no 
accident that on the whole there was more beauty and 

222 The Ugly Truth About Milton Friedman 

decency to be found in the life of the small peoples, and 
that among the large ones there was more happiness 
and content in proportion as they had avoided the 
deadly blight of centralization." 13 

What must be avoided, von Hayek said, is the form 
of the nation-state republic. "It is worth recalling that 
the idea of the world at last finding peace through the 
absorption of the separate states in large federated 
groups and ultimately in one single federation, far from 
being new, was indeed the ideal of almost all the liberal 
thinkers of the nineteenth century — that is, of the British 
enemies of the American Republic. 14 

"An international authority which effectively limits 
the powers of the state over the individual will be one of 
the best safeguards of peace. The International Rule of 
Law must become a safeguard as much against the 
tyranny of the state over the individual as against the 
tyranny of the new superstate [Hayek means the United 
States] over the national communities [Hayek means 
the bankrupt British Empire]." 15 

A year later from Yale University, Mont Pelerin's co- 
founder Ludwig von Mises wrote an identical tract, 
Omnipotent Government. What a belly-laugh the two of 
them must have had, watching American conservatives 
tout their One-Worldism as if it were an appendix to the 
New Testament! What supreme hypocrisy for the lieu- 
tenants of the fascist Count Coudenhove-Kalergi to 
represent themselves as the "libertarian" alternative to 
Adolf Hitler! 

In 1939, von Hayek, then at the London School of 
Economics, had already brought together the initiating 
core for the Mont Pelerin Society under the name, 

The Undead of Economics 223 

"Society for the Renovation of Liberalism." Among the 
members were Frank Knight and Henry Simons, Milton 
Friedman's teachers at the University of Chicago; Cou- 
denhove-Kalergi's close friend Walter Lippmann from 
New York; Viennese philosopher and president of the 
Aristotelian Society, Karl Popper; and Sir John Cla- 
pham from the Bank of England, along with von Mises. 
Mises had just moved to New York University, after a 
stint at the National Bureau of Economic Research with 
Wesley Clair Mitchell. 

Minus "uncertainty theorist" Frank Knight, who 
died in the interim, the same group reconvened after the 
war at the small resort of Mont Pelerin, on the far side 
of Lake Geneva in Switzerland, in April 1947. In 
attendance were the troops of H. G. Wells's "Open 
Conspiracy." Austrian Karl Popper had just succeeded 
Bertrand Russell to the presidency of the ultra-elite 
Aristotelian Society, the inner core of British positivists. 
Clapham, the official historian of the Bank of England, 
had just finished six years in office as president of 
Britain's Royal Society. Walter Lippmann and Chi- 
cago's Henry Simons represented the Americans, and 
Simons brought with him his prize graduate student, 
the author of a set of essays denouncing "realism" in 
economics, Milton Friedman. 

With the Viennese von Hayek and von Mises, the Mont 
Pelerin founding conference represented not the "unity 
of science" but the operational union of the Oxford- 
Cambridge, Chicago, and old University of Vienna 
networks. Coudenhove-Kalergi's feudal patron, Baron 
Max von Thurn und Taxis, whose family had controlled 

224 The Ugly Truth About Milton Friedman 

the intelligence service of the Holy Roman Empire for 
400 years, supervised the proceedings on behalf of the 
European high aristocracy. 

Count Coudenhove-Kalergi, the man to whom von 
Mises and von Hayek owed their safe passage out of 
war-torn Europe, did not attend. He was busy else- 
where; almost simultaneously, he had reconstituted the 
old Pan-European Union as the European Parliamen- 
tary Union at Gstaad, Switzerland, culminating the 
work that he and von Mises had started at New York 
University seminars six years earlier. Formally, the old 
Pan-European Union was not re-formed until 1954, 
with Coudenhove-Kalergi as president, and his protege, 
Archduke Otto von Hapsburg, as a Central Council 
member. General de Gaulle ensured that the organiza- 
tion's influence in European public life would not go 
far, snubbing its offer of the honorary presidency. 

The Mont Pelerin Society is merely the economic arm 
of the "political" Pan-European Union, and the con- 
trolling members of the two organizations overlap. One 
of von Hapsburg's closest friends in the Mont Pelerin 
Society, for instance, is William F. Buckley, Friedman's 
close collaborator and publisher throughout the 1960s. 
In The Buckleys — A Family Examined, author Charles 
Markmann writes: 

"Buckley's friendship with Otto von Hapsburg, the 
pretender to the non-existent Austro-Hungarian throne, 
is anything but a secret of course: Buckley neither hides 
it nor flaunts it, and has himself disclosed that they are 
both members of a very secret group that meets in 
Europe two or three times a year, without any fanfare 
[the Mont Pelerin Society] to discuss world problems 
from a Right- Wing point of view and to weigh possible 

The Vndead of Economics 225 

courses of action. But [Murray] Rothbard recalls dis- 
cussions among his friends at National Review in which 
the theme was simply which monarchy ought to be 
restored — some favored the recalls of the Hapsburgs to 
Austria-Hungary and of the Stuarts to the United 
Kingdom. Others wanted a Hapsburg monarch for 
America." 16 

In such endeavors, the public face of the Pan- Euro- 
pean Union is less important than its covert role. 

Quietly, Otto von Hapsburg moved the field head- 
quarters of the old Pan-European Union, the Center for 
Documentation and Information created by Couden- 
hove-Kalergi and von Mises at New York University, 
to Spain. Von Hapsburg took up residence in Madrid, 
along with various remnants of the Hitler regime, 
including Hjalmar Schacht's son-in-law, SS Commando 
Otto von Skorzeny. Hapsburg's Madrid Center was the 
"safehouse" for visiting ex-Nazis and their Latin Amer- 
ican friends. 

Otto von Hapsburg and his friends are not merely 
intellectual terrorists, but terrorists in fact — something 
that will become more relevant when we discuss Milton 
Friedman's relationship to the Chilean dictatorship. 
Apart from Skorzeny, whose association with his father- 
in-law Schacht persisted through their escapades in 
Egypt during the early 1950s, Hapsburg's Center for 
Documentation and Information housed some of the 
most despised ex-Nazis in Europe throughout the 1950s. 
One was Leon DeGrelle, the Belgian Quisling who 
joined the Waffen SS in 1943, an action that forced him 
to seek asylum in Franco Spain in 1945. While DeGrelle 
was associated with Hapsburg in Madrid — according to 
reports published in the West German weekly Der 

226 The Ugly Truth About Milton Friedman 

Spiegel in 1959 — he collaborated with a putschist move- 
ment in Germany centered around Joseph Goebbels's 
old propaganda chief Werner Naumann. 

Another Hapsburg contact was the Nazis' puppet 
prime minister in wartime Hungary, Ferenc Nagy, who 
later founded the terrorist organization Permindex. 

Permindex was booted out of Europe by de Gaulle 
after the French discovery that the supposed trading 
company had conduited the funds to de Gaulle's would- 
be assassins. Nagy personally handled the money trans- 
fers through White Russian sub-agents based out of 
New Orleans. In New Orleans District Attorney James 
Garrison's investigation of the assassination of John 
Kennedy, Nagy figures as a principal suspect; he had 
been in Dallas immediately before Kennedy was killed 
and was in close touch with all the principal suspects in 
the Garrison investigation, including Clay Shaw, Per- 
mindex's New Orleans representative. When Nagy con- 
duited funds to the French Secret Army Organization 
generals for a projected hit against de Gaulle, Skorzeny 
was in collaboration with the coup plotters. This fact 
emerged after French counterintelligence kidnapped the 
OAS chief of intelligence, Colonel Argoud, in Munich 
in 1961. 

Leader of the Latin American contingent in Haps- 
burg's Center for Documentation and Information in 
Madrid is the chief of Colombia's drug lobby, Alvaro 
Gomez Hurtado, who wrote in his daily newspaper El 
Sigh in August 1977: "Colombians must think very 
seriously about legalizing marijuana immediately, first, 
because it will yield us foreign exchange. And second, 
because we have proven that to prohibit it, to help a 
country that is not interested in its promotion, is 

The Vndead of Economics 227 

damaging to the morals of those charged with enforcing 
the law." 17 

Buckley and Friedman's endorsement of marijuana 
legalization dates from the same year. 

Gomez's paper El Sigh was founded in 1936 by his 
father, Laureano Gomez, who had just returned from 
Germany after a stint as Colombia's ambassador. In a 
founding editorial, Laureano echoed what could pass as 
the credo of the Mont Pelerin Society: 

"Hitler has proven that it is possible to wage a long, 
difficult and immensely costly war without money. The 
Jews thought they could boycott Germany by removing 
all the gold and transferring it to the U.S. They were 
mistaken. The Fiihrer has made a truly miraculous 
discovery: he has found that he and his people can get 
along on the work standard." 18 

Laureano Gomez used the Nazi salute in public. He 
became Colombia's president in 1950, and launched the 
series of massacres known as La Violencia, in which 
300,000 Colombian men, women, children, and infants 
were systematically murdered in an attempted "purge" 
of "heretics" and "liberals." His son Alvaro took over 
the paper's editorship in 1952 — at the height of his 
father's massacres — the same year that he became a 
member of Hapsburg's Center in Madrid. 

Another Latin American member of the Center for 
Documentation and Information is Andres Marcelo 
Sada, a former graduate student of Ludwig von Mises. 
As head of the Mexican Employers Confederation in 
1977, Sada attempted to bring down the Echeverria 
government in response to the Mexican president's 
aggressive land reform program. Documents intro- 
duced as evidence in the Mexican Congress on Septem- 

228 The Ugly Truth About Milton Friedman 

ber 7, 1978, indicate that Sada had tried to persuade the 
Central Intelligence Agency to join in a plan to over- 
throw the Mexican government, along with Spanish 
right-wing terrorists and agents of the fascist Chilean 
secret police. 19 

Otto von Hapsburg's operation is a barely cleaned- 
up version of Count Coudenhove-Kalergi's Nazi sup- 
port organization, integrating sections of the old Nazi 
machine itself. The Mont Pelerin Society is Hapsburg's 
economic think tank. The monarchist terror network 
affiliated with Otto von Hapsburg in Madrid is com- 
posed of men trained personally by Ludwig von Mises 
and Count Coudenhove-Kalergi at their New York 
University seminar in the 1940s. One of these is Andres 
Marcelo Sada. Another is Gustavo R. Velasco, profes- 
sor and founder of the Free School of Law in Mexico 
City. Velasco, head of the Mont Pelerin Society in Latin 
America, dates back to the Hitler sympathizers in the 
Mexican National Action Party who funded his "Free 
School" in 1944. 

Velasco's student at the Free School, Luis Pasos, is 
Milton Friedman's closest personal contact in Mexico. 
The author of several books praising Friedman, Pasos 
was a founder of what Mexican intelligence sources call 
"a right-wing shock troop and terrorist unit,*' the 
Spanish-American Unification Guard, or Guia — 
"Fiihrer" — in its Spanish acronym. Pasos, who arranges 
Friedman's speaking engagements in Mexico, is also 
director of the Institute of Interamerican Integration. 

When Milton Friedman's former University of Chi- 
cago students in the junta that seized Chile in 1973 
proceeded to butcher the Chilean population, Fried- 
man's personal role in the affair drew attention inter- 

The Undead of Economics 229 

nationally. To the detriment of clear thinking, the furor 
over Friedman's support for Chilean fascism became an 
endless back-and-forth over what Friedman's actual 
relationship to the Pinochet junta was. Friedman de- 
nounced as "hysterical" allegations that he was a col- 
laborator of a regime comparable to that of Hitler or 

This debate is all wasted breath. The point is not 
merely that Friedman got his hands and possibly his 
elbows dipped in blood in Chile, but that he has been 
part of a neo-Nazi movement since 1947. Worse, he is 
an officer of a Nazi organization — vice-president of the 
Mont Pelerin Society, Milton Friedman is not sullied by 
contact with the Chilean Nazis. He, Pinochet, Alvaro 
Gomez Hurtado, and the rest are part of a fascist 
machine that has been in place for thirty-five years. 

All this helps to clarify why a mediocrity like Fried- 
man won an international reputation, and why he is so 
fond of the economic policies of Adolf Hitler. 


W>rst Economist 

in the W)rid 


My only concern is that they push it long and hard 

—Milton Friedman on the Chile dictatorship's 
"shock treatment" economic program 

This year's 20 percent inflation rate has made it fashion- 
able to blame inflation on big-government spending 
programs and to yearn for a "Friedmanesque" regime 
of monetary stability. Even more amazing than the 
public's failure to see through Friedman's policy is its 
short memory. Americans voted the Republican Party 
out of office, and defeated its bid for office three times 
in postwar presidential elections as punishment for 
listening to Milton Friedman and his cothinkers. On the 
record, they are the worst economists in the world. 

Milton Friedman's claim that his theory has never 
been put into practice for a sufficiently long period of 
time is akin to the complaint of a doctor who advises 
his patients to hold their heads under water to cure 
influenza. Before long, the sputtering patient will pull 

232 The Ugly Truth About Milton Friedman 

his head out of the tub and gasp for air, still suffering 
from influenza. "You didn't follow my instructions!" 
the doctor explodes. "You didn't continue the treatment 
long enough!" 

In the United States, Friedman shares the blame for 
the recessions of 1953, 1957, and 1960, bears principal 
responsibility for the 1969 recession, and was instru- 
mental in starting the 1979 collapse. In Israel, Fried- 
man's advice to the newly elected Begin government 
was largely responsible for that country's 20 percent /w 
month inflation, which has destroyed the Israeli cur- 
rency. In Chile, Friedman devised an economic policy 
that reduced average caloric intake to less than 1200 
calories a day and condemned large sections of the 
population to malnutrition, disease, child prostitution, 
and other miseries. 

However, from the standpoint of economic science, 
these atrocities pale beside Friedman's performance 
during the past year as economic adviser to the Conser- 
vative government of Margaret Thatcher in Great Brit- 
ain. Granted that the Keynesian program of deliberate 
unproductive investment is responsible for much of the 
world's inflation problem, Friedman has achieved an 
experimental result that no Keynesian ever dreamed of. 
When Friedman was invited publicly by the newly 
elected Tory government to prescribe his monetary 
medicine to the world's most decrepit economy, the 
British inflation rate stood at 6 percent. As of April 
1980, British inflation had nearly quadrupled to 22 
percent per year, the worst in the entire industrial 
sector, while industrial production had fallen off sharply 
by more than 4 percent! All this occurred while Chan- 
cellor of the Exchequer Geoffrey Howe faithfully re- 

The Worst Economist in the World 233 

duced money supply to an average growth rate of just 
over 10 percent per year. 

Never once in postwar history has anyone managed 
to increase the inflation rate of an industrial country 
fourfold in a mere twelve months, not even after the 
price of the world's most essential commodity, petro- 
leum, rose fourfold at the end of 1973. Friedman at 
least deserves a sort of congratulation for producing a 
laboratory result where his Keynesian competitors 

It may be argued that Great Britain, so depleted that 
its industrial production per capita is now lower than 
that of Spain, is not a fair experimental subject. How- 
ever, according to Heritage Foundation economist and 
Daily Telegraph correspondent John O'Sullivan, "This 
is the most important test that monetarist economics 
has ever had." 1 Recent gurglings from Chancellor of 
the Exchequer Howe make clear that the British govern- 
ment will, indeed, keep its head under the water until 
the experiment succeeds or fails. If the Tory government 
stays in power long enough, the inflation rate will 
doubtless fall, once a sufficient number of Britons have 
emigrated to prosperous neighboring countries like 

Where Ike went wrong 

Americans remember the Eisenhower years as the good 
old days. Relative to the last decade, that is sensible. 
Yet, the Eisenhower years began this nation's postwar 
economic misery. It is not merely that the country 
suffered three recessions during the General's two terms 

234 The Ugly Truth About Milton Friedman 

in office. America failed to build its productive capital, 
or, more accurately, was prevented from doing so by a 
combination of Friedmanite economic policies at home, 
and International Monetary Fund policies abroad. 

This was not Ike's intention. He did not know 
economics and depended on the Wesley Clair Mitchell 
mafia at Columbia University, including future Federal 
Reserve Chairman Arthur Burns, for advice. That ad- 
vice was terrible. It was no different in principle, or in 
consequence, than the advice that Wesley Clair Mitchell 
and the National Bureau of Economic Research gave 
Herbert Hoover. 

To Eisenhower's credit, he did manage to reverse 
gears after the Soviet launching of Sputnik, and laid the 
foundation for the scientific and economic successes of 
the National Aeronautics and Space Administration 
during the 1960s. Prior to the "big-government" ap- 
proach to fostering research and development under 
NASA, the American economy ran on the momentum 
of the wartime economic build-up, when rates of real 
capital formation in industry exceeded 20 percent per 
year. While consumer income rose slowly, the growth 
of labor productivity inched along at an average of less 
than 2 percent per year during the period from 1950 to 
1958. Eisenhower's action with regard to space re- 
search — the outcome of a successful brawl with Gen. 
John B. Medaris and the kooks who wanted to go into 
space for military purposes only — was by and large 
responsible for the one brief burst of real productive 
growth the American economy had during the postwar 
period, from 1959 to 1967. 

In matters of basic economic policy, Eisenhower 
never had a chance. After the war, he moved to the 
presidency of Columbia University — where John Dewey 

The Worst Economist in the World 235 

and a hit squad of Viennese emigr6s ran the social 
sciences and Wesley Clair Mitchell's students ran eco- 
nomics — as a steppingstone to the White House, under 
the sponsorship of the Thomas E. Dewey wing of the 
Republican Party. Wesley Clair Mitchell's prize gradu- 
ate student, Arthur F. Burns, then ruled the Economics 
Department in a condominium with the future president 
of the Mont Pelerin Society and Milton Friedman's 
closest academic ally, Professor George Stigler. When 
Ike replaced the deceased Nicholas Murray Butler as 
president of Columbia in 1949, Arthur Burns became 
Eisenhower's fawning, omnipresent personal aide. Ei- 
senhower had displayed considerable resourcefulness in 
dealing with the armed forces of Nazi fascism. Colum- 
bia was a more subtle and dangerous enemy; it was the 
Eastern fortress of the men who had sponsored Count 
Coudenhove-Kalergi, Hjalmar Schacht, and Hitler's 

It was not, of course, possible to say the same things 
in the late 1940s to an American population that had 
fought against Hitler that the same men had said in the 
1930s. By weight of sheer popular reaction, the hard- 
core kooks like von Hayek and von Mises became an 
academic fringe, predicting the doom of capitalist soci- 
ety and the end of industrial progress; they were de- 
spised for their open apologies for the Great Depres- 
sion. George Stigler found himself hated by the 
generation of GI Bill graduate students who came to 
Columbia fresh out of the armed forces, and soon 
decamped to the University of Chicago with Milton 

Arthur F. Burns, who played the "pragmatist" to 
Stigler's ideologue image, remained at Columbia. 

The differences between Burns and Stigler were 

236 The Ugly Truth About Milton F ri edman 

strictly on the surface. Beginning in 1921 when he 
entered Columbia as a seventeen-year-old freshman, 
Burns was Wesley Mitchell's lifetime protege. He joined 
the National Bureau of Economic Research staff in 
1930 and later replaced Mitchell as the Bureau's director 
when Mitchell died. It was also in 1930 that he picked 
up Milton Friedman, an accounting student at Rutgers 
University in New Jersey. 

Milton Friedman was an Arthur F. Burns project. 
Born in Brooklyn, New York, in 1912, Friedman was 
the son of poor Jewish emigrants from the Ruthenia 
region of the Austrian empire. His family moved to 
Rahway, New Jersey, after his father's death when 
Milton was fifteen years old. The boy was good at 
numbers, not sufficiently gifted for the sciences, but 
clever at accounting. At age sixteen he received a state 
scholarship to train as an actuary at Rutgers. There he 
caught the eye of Arthur Burns, who was doing an 
instructorship at Rutgers and conducting a seminar on 
Wesley Mitchell's theory of the business cycle. It was 
one year before the biggest business cycle of them all — 
1928. Burns knew the kind of talent he was looking for, 
and took young Friedman to meet Mitchell at Colum- 
bia; Mitchell and Burns arranged a graduate scholar- 
ship at the University of Chicago for the impecunious 
young Friedman. After graduating from Rutgers, 
Friedman wound up in Professor Frank Knight's semi- 
nar at Chicago. 

Knight represented the outer fringe of monetarism, 
the closest thing to a Viennese without a German 
accent. Although Friedman felt personally closer to 
monetarist Henry Simons, he did his master's thesis for 
Knight. Knight's view was that since human beings do 

The Worst Economist in the World 237 

not act rationally, profit merely represents the fortuitous 
income a corporation obtains when it lucks out in the 
marketplace. According to Knight, who is lauded as 
"the founder of the modern theory of the firm," whether 
a corporation invests in more productive capital goods 
and attracts more skilled labor is irrelevant, since profit 
is in all cases a matter of "uncertainty." He tried to 
translate into the language of business school courses 
the Viennese view that production did not create wealth, 
but that "the human act of production amounts to no 
more than altering the position of things in space and 
leaving the rest to nature." 2 So much for Milton Fried- 
man's basic training. 

Friedman returned to Columbia, now working di- 
rectly for Wesley Mitchell in a doctoral program. In 
1935, Mitchell sent him to Washington to work as a 
staff researcher at the Natural Resources Committee of 
Roosevelt's New Deal, one of the National Bureau's 
tentacles in government. In 1937 he returned to New 
York as a staffer for the National Bureau. The next year 
he married Rose Director — the sister of Chicago eco- 
nomics professor and future Mont Pelerin Society co- 
founder Aaron Director. Rose Director Friedman is the 
coauthor of Friedman's 1979 retread of Capitalism and 
Freedom, Free to Choose. 

Back in those days, the hard-and-fast distinction 
between "liberal" and "conservative" economics that 
later became stock in the theater of post-World War II 
economics was unknown. After all, the University of 
Chicago had been a project from the start of the British 
Fabians, Toynbee Hall, and Jane Addams's Hull House. 
Even the Chicago mafia sent telegrams to Roosevelt in 
those days urging more government spending to lift the 

238 The Ugly Truth About Milton Friedman 

economy out of the Depression trough. Friedman 
learned the just-published Keynes theory at Columbia, 
and, as we saw in the first chapter, used enough of 
Keynes's bag-of-tricks to make it difficult for him to 
tell the Keynesians where, exactly, he disagreed with 

At the National Bureau and later at the wartime 
Treasury, Friedman was hard to separate from the other 
products of the Chicago, Columbia, Yale, and Harvard 
economics departments. His young assistant at the 
National Bureau was Walter W. Heller, later the arch- 
Keynesian chairman of John F. Kennedy's Council of 
Economic Advisors. "His technical work was brilliant/* 
Heller said of his old teacher. 3 Possibly, by Heller's 
standards. At the National Bureau with Friedman was 
another Keynesian, Joseph Pechman, now the director 
of economic studies at that liberal citadel, the Brookings 

To a contemporary observer, Friedman appeared on 
the fast track to a senior position in the New Deal 
bureaucracy. In 1941 he became chief economist at the 
United States Treasury Division of Tax Research. Plan- 
ning wartime tax collections, he drew on the British 
Treasury's tax program, devised by John Maynard 
Keynes and F. W. Paish, as Friedman reported in a 
1943 book, Taxing to Prevent Inflation. This first work 
is what Friedman would now shun as Keynesian fiscal- 
ism. It is less concerned with financing the war effort as 
such than with reducing consumption. The book's thesis 
is that the federal government should compensate for 
deficit spending by increasing taxes to prevent con- 
sumption. (The Roosevelt administration adopted the 

The Worst Economist in the World 239 

superior alternative of locking up consumer income in 
savings bonds and rationing instead.) 

The high point of Friedman's wartime career was a 
1943 switch to the statistical section of the Division of 
War Research. He was now working for another Wesley 
Mitchell pickup, Wassily Leontief, later the founder of 
the Initiatives Committee for National Economic Plan- 
ning. Friedman's department prepared the statistical 
tables for Leontief's top-secret "Project Scoop," a plan 
to put the entire American economy on the same input- 
output matrix that Leontief was preparing for the 
Strategic Bombing Survey. Air Force intelligence put 
up $1.5 million for the plan, a furtive (and unsuccessful) 
attempt to put America under the total "National 
Planning" regime that Leontief and his Initiatives Com- 
mittee were still boosting thirty years later. Friedman's 
apprenticeship under the fascist economists of the Stra- 
tegic Bombing Survey should be no shocker at this 
point in the story; Friedman later endorsed the Survey's 
warm recommendation of Hitler's economic manage- 
ment in his 1956 book Studies in the Quantity Theory of 

America had emerged from World War II as a world 
superpower, the nightmare that Friedrich von Hayek 
railed against in his 1943 The Road to Serfdom. Even 
the American leaders who had cut their teeth on British 
principles of policy and had backed Britain through the 
worst no longer felt like junior partners. Roosevelt 
informed an apoplectic Winston Churchill bluntly at 
the Casablanca conference that America would no 
longer cooperate with the colonialism of the British 

240 The Ugly Truth About Milton Friedman 

Empire. Roosevelt wanted American industry to export 
its know-how and industrialize the developing sector 
economies. Because of Harry Truman's bungling of the 
Marshall Plan, that was never to happen. The Interna- 
tional Monetary Fund and its tentacles in the planning 
organs of the Marshall Plan shut off America's export 
markets, in repetition of Churchill's financial warfare 
strategy of the 1920s. We are going to look at the same 
business again, from the inside. 

Republican America reacted to the conspiracy that 
Milton Friedman, Leontief, and others were up to their 
ears in. This was not government-sponsored economic 
growth, as with the National Aeronautics and Space 
Administration, but an antigrowth conspiracy inside 
the federal government. 4 

Richard Nixon — who emblematized how stupid the 
reaction was — describes the mood when he first attained 
public office as a congressman: 

"People were tired of the privations and shortages of 
four years of war, and in the burst of postwar prosperity 
they were beginning to bridle against the governmental 
regulations and interference that were written into so 
much of the New Deal legislation. . . . Returning veter- 
ans could not find homes at prices or rents they could 
afford; many could not find housing at all. The shortage 
of consumer goods was exacerbated by the many long 
strikes in 1946, and prices skyrocketed as a result. Some 
butcher shops in the district put signs in the window: 
'No meat today? Ask your congressman.' " 5 

Unfortunately for this nation, Nixon's description 
was accurate. A generation that had gone out to remake 
the world in wartime came home to find an economy 
mismanaged by Harry Truman and his advisers; the 

The Worst Economist in the World 241 

beginnings of Cold War instead of the promised post- 
war entente with the Soviet Union; the start of an 
anticommunist witchhunt that made a disgusting farce 
out of American political morality; and the absence of 
the qualities of national leadership that Roosevelt had, 
during the war years, provided. The postwar resolve 
collapsed into the suburban banality that Richard 
Nixon represented so well. As LaRouche described it in 
his 1979 autobiography Power of Reason, "The United 
States was plunging downhill morally.'* 

"Mass insanity, moral imbecility are not inappro- 
priate terms, not exaggerations, no matter how much 
you wish to reject the truth of such terms. Your 
behavior during what is usually termed 'the Mc- 
Carthyism period' is comparable as an historical socio- 
psychological phenomenon to the spread of flagellan- 
tism during the fourteenth century, and to the 
phenomenon usually cited as comparable during the 
turn of the 1950s: 'witchhunt.' You were, speaking on 
the average, insane." 6 The generation of suckers that 
put Friedman's Capitalism and Freedom on the bestseller 
lists in 1962 was in incubation. 

Friedman, who heretofore had been the epitome of 
the New Deal bureaucrat the Republicans ran against 
in 1946, changed horses fast. In 1946, he coauthored 
with George Stigler the first of his free-market tracts, 
on the housing market: "Roofs or Ceilings." Stigler 
and Friedman attacked rent control at a time of extreme 
inflation in housing prices, arguing that a free market 
in house prices would ultimately provide builders the 
incentive to build more. In the meantime, they recom- 
mended "doubling up." 

The tract was unpopular and largely ignored, but it 

242 The Ugly Truth About Milton Friedman 

represented something of an initiation rite for Milton 
Friedman. He had earned his passage to the exclusive 
Mont Pelerin conclave in Switzerland the following 

When Friedrich von Hayek rose to deliver the inau- 
gural address of the Mont Pelerin Society in 1947, he 
surveyed an audience that included most of Wesley 
Mitchell's boys: George Stigler, Henry Simons, Chicago 
professor Aaron Director, and Director's young 
brother-in-law, Milton Friedman. Von Hayek, Viennese 
aristocrat right down to his pince-nez, told them: "The 
old liberal is not of much use for our purpose. What we 
need are people who have faced the arguments from the 
other side, who have struggled with them, and fought 
themselves through to a position from which they can 
justify their views." 7 Milton Friedman was reborn a free 

These are the men who lay in wait for the unsuspecting 
Dwight Eisenhower when he walked into his office at 
Columbia's Low Library in 1949. Stigler, Burns, and 
Raymond Saulnier ran the Columbia Economics De- 
partment, and attached themselves to Eisenhower with 
sufficient tenacity to gain control of economic policy 
during Eisenhower's first administration. Burns became 
chairman of the Council of Economic Advisors, Saul- 
nier his deputy. Stigler joined Milton Friedman and 
Aaron Director, who had chaired the panel on free 
enterprise at the University of Chicago. Stigler and 
Friedman, the future leaders of the Mont Pelerin Soci- 
ety, did what von Hayek wanted them to do: stake out 
the extreme ideological position of monetarist econom- 
ics no matter who listened to them. "Twenty years ago, 

The Worst Economist in the World 243 

when I was at Yale, Milton Friedman was considered a 
crackpot," one of Friedman's Chicago colleagues re- 
minisced in 1976. "If he had applied for a job, he would 
have been turned down." 8 

Eisenhower did, unfortunately, listen to Arthur 
Burns, who threw the economy into recession the month 
Ike took office. In January 1953, for no particular 
reason, the Federal Reserve raised the discount rate, 
and told banks to cut back their loans. The Reserve 
formally withdrew support for the Treasury's own fi- 
nancing operations in March, producing what was then 
the worst postwar bond market crisis. The economy had 
done no more than expand at a moderate rate, with a 
significant rise in stock prices in late 1952, to which 
Milton Friedman attributed the Fed's "concern about 
inflation," 9 With remarkable candor, Arthur Burns 
later wrote that the ensuing recession "reflected the 
bewilderment of a financial community that had become 
accustomed to stable interest rates and had forgotten 
how a restrictive credit policy works. Government offi- 
cials could overlook the criticism that 'tight money' 
brought on the recession which became visible around 
mid- 1953. They knew better, as did many others." 10 

Arthur Burns and Federal Reserve Chairman William 
McChesney Martin began tightening the monetary 
thumbscrew again in April 1955, gradually raising the 
discount rate from 1 percent to 3 percent in August 
1957 — by which time the big 1957-1958 recession was 
already well in progress. The Republican Party was 
butchered at the polls during the 1958 congressional 
elections; for the first time the old McKinley Republican 
base in Ohio lost out to the Democrats. Unemployment 
had risen to 4.7 million from 2.8 million, while capital 

244 The Ugly Truth About Milton Friedman 

investment, at $37 billion in 1957, dropped to $30 
billion in 1958. 

Although the Gross National Product rose during 
the 1950s, the health of the American economy, from 
the standpoint of Alexander Hamilton or Claude Chap- 
tal, declined. Under the Arthur Burns regime of stop- 
and-go monetary policies, American industry, barred de 
facto from export markets by the International Mone- 
tary Fund, suffered from the lowest rate of industrial 
capital formation and productivity growth among the 
major industrial powers. The booms and contractions 
of the 1950s represented, against a base of inadequate 
industrial development, mere expansion and contraction 
of consumer credit. 

Figures 1 and 2 provide us with two basic measure- 
ments of America's economic performance. The first 
looks at the productivity of the American economy in 
real terms, measuring the energy intensivity of the 
American economy against the economy's productivity 
growth. Figure 1 shows that during the years 1954 to 
1959, the economy expanded quantitatively without ex- 
panding qualitatively. The rate of productivity growth 
remained constant at a low level, while increased energy 
consumption in manufacturing showed an expansion in 

The picture changed dramatically in 1959. By that 
time Eisenhower had sent Arthur Burns back to Col- 
umbia, changed Treasury secretaries and, most impor- 
tant, inaugurated the NASA space program. For the 
next eight years — due to a research and development 
policy begun by the Eisenhower administration — the 
trend line in Figure 1 turns sharply upward. At this 
point, the economy grew both quantitatively and quali- 
tatively. By the estimate of one private study, NASA 

Figure 1 
Manufacturing output vs. energy flux density 


Units of mfg. output 










.30 .35 .40 .45 .50 














Ag 10% 







Ag 7% 


■Mn 1% 



Tr 6% 
Cn 5% 

Ag 1% 


-Mn 1% 

NP 62% 



Cn 5% 



Ag Agriculture 

Mn Mining 

Cn Construction 

Tr Transportation 

Mf Manufacturing 

NP Nonproductive; wholesale, 

retail, government service, financial 

Mn 1% 

The Worst Economist in the World 247 

research contributed $4 to the economy for every $1 the 
agency spent. During these years, American productiv- 
ity growth averaged better than 3 percent, due to the 
rapid incorporation into production of new scientific 
knowledge transmitted by NASA. The nation's stock of 
productive capital grew from $130 billion (in 1972 
dollars) to $180 billion, the fastest rate of capital 
formation in postwar history. 

The other adverse change, which persisted from the 
1950s into the later period, was the decline in the 
percentage of Americans employed in goods-producing 
industries. This fell from roughly half at the end of 
World War II to barely a third by the early 1970s. 
Because of the low rates of capital formation under the 
dictatorship of the National Bureau of Economic Re- 
search in Washington, business oriented its investment 
away from basic industry into the so-called service 
economy. This and the related low rate of productivity 
growth define the basic weakness of the U.S. economy. 

Eisenhower never got the credit he deserved for the 
policy shift he brought about quietly in 1958. Americans 
remembered only the recessions, and rejected — or at 
least made it possible for a margin of vote fraud to 
defeat — Richard Nixon at the polls in 1960. 

What the Republican Party did afterwards is an 
unparalleled exercise in political masochism; It rejected 
Arthur Burns for Milton Friedman, William F. Buckley, 
and a crew of Viennese spooks. These included Robert 
Strauz-Hupe, now chairman of the Foreign Policy 
Research Institute at Philadelphia and an adviser to 
Ronald Reagan; Viennese economist Gottfried Haber- 
ler, now, with von Hayek, the last survivor of the old 
prewar group; and Karl Brandt of Stanford University. 

248 The Ugly Truth About Milton Friedman 

The political strategy that von Hayek set forth in 
1947 had succeeded in capturing, if not the United 
States, at least the Republican Party. Milton Friedman 
was Goldwater's chief economic spokesman, his posi- 
tion secured by the cult bestseller status of Capitalism 
and Freedom in 1962. In speeches and position papers 
for the campaign, Friedman argued that Goldwater was 
not against labor unions; he merely wished to put them 
under antitrust laws, eliminating the rights that labor 
had won in the industrial organizing drives of the early 
1930s. Goldwater did not want to eliminate Social 
Security, said Friedman; he merely wanted to make it 
voluntary. The New York Times quoted a liberal econ- 
omist during the campaign saying that Friedman is 
"brilliant and articulate, but he is also utterly irrespon- 
sible and doesn't give advice that anyone would 

Democratic Party economists had a field day with 
this. Paul Samuelson wrote in the New York Times two 
weeks before the November 1964 elections: 

"Knowledgeable people who are themselves enthu- 
siastic about trade unions and about the Social Security 
trends of our times will be astounded to read Milton 
Friedman's words that Senator Goldwater is not against 
Social Security or labor unions. To many of them, this 
will seem an odd interpretation. But actually, if you 
understand the vantage point from which Milton Fried- 
man looks at Barry Goldwater, you will understand 
these statements: in his many scholarly writings, Dr. 
Friedman has expressed the views that trade unions, as 
they are now functioning, are not a good thing for the 
community or even for the workers as a whole. But that 
does not mean he is against trade unions as such. 
Stripped of their powers to interfere with competitive 

The Worst Economist in the World 249 

pricing of labor, unions may continue to exist as 
fraternal organizations to promote Gemutlichkeit and 
innocent merriment. 

"Senator Goldwater's attitude in 1964 can be fairly 
described by what Finley Peter Dunne said about the 
attitude of employers toward unions: 

"Mr. Hennessey: But these open-shop min say they're 
fir Unions. 

"Mr. Dolley: Shure, if properly conducted. No 
strikes, no rules, no contracts, no scales, hardly iny 
wages and dam few members." 12 

Painful as it is to agree with Paul Samuelson about 
anything, it was all true. Americans defeated Goldwater 
by a landslide margin, which he richly deserved (more 
than the country deserved Lyndon Johnson). Friedman, 
whom any person in his right mind would recognize as 
"utterly irresponsible," led Goldwater all the way down 
the garden path. 

This makes even more astonishing Richard Nixon's 
decision to make Friedman the administration's chief, if 
unofficial, economic adviser, after his election in 1969. 
Journalist Leonard Silk, who chronicled the tortuous 
route of Nixon's economic policy with partisan glee, 
suggested it was because Nixon and his colleagues were 
stupid: "Mr. Nixon's economists were by no means 
unaware of the complexities surrounding an application 
of Friedman's money-supply rule; they were, after all, 
'Friedmanesque,' as [Council of Economic Advisors 
Chairman] Paul McCracken described himself, rather 
than 'Friedmanite.' Yet Professor Friedman's rule, if 
pragmatically applied, had overwhelming appeal to an 
Administration that did not want to increase taxes as a 
means of stopping inflation." 13 

Nixon, in any event, had been a wartime pal of 

250 The Ugly Truth About Milton Friedman 

Friedman's at the Office of Price Stability at Treasury, 
and learned his economics at the White House at Arthur 
Burns's knee. Burns now moved back to the White 
House from Columbia as Counselor to the President. 
The next year, Burns replaced the aging William Mc- 
Chesney Martin as chairman of the Federal Reserve's 
Board of Governors. 

During the first half of 1969, the Federal Reserve 
held the rate of money supply growth to 4.4 percent per 
year, right in the middle of Friedman's recommended 
range of 3 to 5 percent. Prices rose by an annual rate of 
5.8 percent, faster than they had during what Nixon 
considered a period of monetary laxity under Lyndon 
Johnson, when they had risen by 4.6 percent per year. 
This did not upset Friedman, who believed that mone- 
tary policy operated with a six-month lag. He wrote, 
however, in August 1969, "If the rate of price rise has 
not begun to abate by the fourth quarter of this year, it 
will be time to ask us for an explanation." 14 

But the rate of price inflation did not abate. It 
continued at 5.8 percent per year through the second 
half of 1969, and showed no signs of improvement. 

Friedman prescribed more of the same medicine, 
and the Federal Reserve, under Nixon's imprimatur, 
obeyed. Monetary growth stopped dead in the half-year 
from June 1969 to December 1969, and the economy 
collapsed. Starting in the summer, industrial production 
fell, and unemployment rose from 3.5 percent in 1969 to 
5 percent in May 1970. Despite the deterioration of 
economic conditions, inflation did not fall. During the 
first half of 1970, inflation was higher than it had been 
the previous year. As Leonard Silk summed it up: 

"The economy was slipping into recession, with no 

The Worst Economist in the World 251 

tangible evidence that inflation was abating. Interest 
rates had climbed to levels not seen in a hundred years, 
with devastating effects on housing. The federal budget 
was dropping into deficit, aggravating pressures on 
money markets. The stock market went into the worst 
decline it had experienced since the Great 
Depression." 15 

Friedman nearly brought the American economy 
through a repetition of the 1929 crash, by identical 
methods. In May the Penn Central Railroad went 
bankrupt, leaving hundreds of millions of dollars in 
short-term commercial paper outstanding. The entire 
structure of American short-term credit, which de- 
pended on tens of billions of dollars in short-term 
promissory notes secured only by the faith of the 
borrower, was in danger. Bankers sat in their offices 
deciding whether or not to panic, and Arthur Burns 
made a series of frantic phone calls to New York and 
Chicago promising that the Fed would provide as much 
money as needed as soon as they needed it. From dead 
zero, the rate of money supply growth jumped to 13 

Penn Central did not lead to a general panic in the 
American credit markets. However, the sudden lurch 
from monetary strangulation to a postwar extreme in 
monetary laxity sent the American dollar skidding 
down toward the great debacle of August 1971. The 
first big dollar crisis of the Nixon administration broke 
out almost as soon as Burns opened the floodgates in 
May 1970. 

Richard Nixon was stupid, but not that stupid. On 
the next moonless night he buried Milton Friedman's 
reputation in the White House back lawn. Immediately 

252 The Ugly Truth About M ilt an Friedman 

after followed Nixon's great recantation, "We are all 
Keynesians now," meaning, "We are no longer Fried- 

That didn't get either the White House or the United 
States out of the hole that a year of Friedman's medicine 
had put it in. By August 15, 1971, Nixon caved in to the 
demands of Rep. Henry Reuss and Treasury Under- 
secretary Paul Volcker, de-linked the dollar from gold, 
and placed wage-price controls on the American econ- 
omy that would, within two years, lead to double-digit 

Friedman's mugging-mate, William F. Buckley, Jr., 
had what turned out to be the most appropriate com- 
ment on Milton Friedman's brief career as oracle to the 
White House. In an August 16, 1971 editorial in Na- 
tional Review entitled "Goodbye Milton Friedman," 
Buckley wrote: 

"Mr. Friedman can absolutely be counted upon to 
say that his theories were not given an adequate exer- 
cise. There is no doubting that he is correct. But it is 
possible that his theories suffer from the overriding dis- 
qualification that they simply cannot get a sufficient 
exercise in democratic situations — because it takes 
longer for them to produce results than the public is 
prepared to wait." 16 

Friedman in Chile 

Buckley was one hundred percent correct, although 
tactless to admit that the Friedman program requires a 
dictatorship to operate. As it turned out, Friedman did 
not have long to cool his heels at the University of 

The Worst Economist in the World 253 

Chicago. The overthrow of the Allende regime in 
September 1973 gave Friedman's students, known lo- 
cally as "the Chicago boys," a semi-industrial country 
to experiment with. 

Chile's rape at the hands of the Chicago mafia must 
have occasioned a cheery moment in hell among the 
Palmerston cabinet, who did the same to China during 
the Opium Wars. It is not merely that the Pinochet 
regime, staffed by Friedman's University of Chicago 
trainees, engaged in torture on a scale that disgusted 
the civilized world. They took a country that had the 
makings of industrial republicanism — with or without 
the help of overthrown President Salvador Allende — 
and broke its industry, turned it over to raw materials 
extraction, and bled it dry for debt service. 

This is the unfortunate nation that, Milton Friedman 
told Business Week magazine November 26, 1979, "will 
be regarded as one of the economic miracles of the 
twentieth century." We will see what kind of miracle 
it is. 

Friedman represents Chile as a nation of "free trade." 
This is an outrageous lie. Chile has become a creditors' 
dictatorship. Between the coup in 1973 and the begin- 
ning of 1979, Chile's annual payment of debt service to 
international banks rose from $200 million annually to 
$1.6 billion — an eightfold increase that is unparalleled 
in modern history. This stupendous increase in debt 
service payments occurred while the economy had col- 
lapsed to production levels barely half of what they 
were under the deposed Allende regime. At the time of 
the coup, debt service consumed about 10 percent of all 
export revenues. By 1979, two thirds of Chile's exports 
went to pay debt service. A century earlier, the East 

254 The Ugly Truth About Milton Friedman 

India Company had done the Chinese the courtesy of 
providing a commodity — opium — in return for China's 
foreign exchange. This time the bankers simply 

A few fortuitous factors, such as an increase in the 
world market price of Chile's major export, copper, 
helped pay some of the debt burden. But the Pinochet 
regime did the bulk of it by eliminating food imports. 
To do this, it reduced average caloric consumption in 
1 975 to less than 1 ,200 calories per day. In a 1976 report 
to the Organization of American States, the French 
scientific institute L' Evolution Psychiatrique wrote of the 
government's economic policy: 

"Its most dramatic consequences are observed in the 
psycho-motor development of children. The spirit sad- 
dens to see a two-year-old seated on the ground, 
scarcely able to keep its balance. It cannot smile, or 
play, or look at its hands; it cannot stand, much less 
walk or speak. It weighs only 20 pounds. . . . Why even 
talk of the lack of maternal attention, the increase in 
child prostitution, the deterioration of all forms of 
social aid? Why need one speak of mental health under 
a regime of terror, of systematic torture?" 17 

Such are the consequences of Friedman's policies 
when given enough time "to work." Friedman's reac- 
tion to being caught in the act was that of a four-year- 
old who has drowned his baby sister in the bathtub. For 
example, Business Week, whose economics department 
is composed of professed Friedmanites, reported as a 
bland matter of fact on May 11, 1976: "The Chilean 
coup that overthrew Salvadore Allende in late 1973 
replaced one set of economic ideologues with another. 
The' Marxists who strove for total regulation of the 

The Worst Economist in the World 255 

economy have been succeeded by a group of policy- 
makers known as the 'Chicago Boys.' Reason: they 
ardently embrace the free-market teachings of Univer- 
sity of Chicago economist Milton Friedman, who vis- 
ited Chile for six days last year to counsel them." At the 
time, industrial production was only half the 1973 level 
if copper is taken out of account, unemployment stood 
at 20 percent, and inflation had increased from 270 
percent a year under the Allende regime to 340 percent 
a year under the Chicago boys. 

Business Week squeamishly reported that the Chicago 
boys had taken their toll: "Despite the fearful repres- 
sion, people still cautiously complain. In Conchali, a 
northern district of Santiago, the families are decidedly 
lower middle class — taxi drivers, mechanics, seam- 
stresses. Over the years they had hauled themselves out 
of poverty. Now unemployment and recession have 
pushed them back again. 'My husband drives a cab 
from curfew to curfew,' says one housewife, 'but still he 
does not make enough to feed us all.' " 

Friedman blew up at the staid magazine that until 
then had usually supported his views. "I have no regrets 
except for the utter irresponsibility of American publi- 
cations, including Business Week, in dealing with this," 
he said a few months later. 18 But he frantically tried to 
dissociate himself from the practices of the Pinochet 
government, the closest thing to the Hitler regime in 
the postwar period. "I did not then and do not now 
condone the regime in Chile," he said. "I had no 
contact with people in Chile prior to the visit, and have 
had none since." 19 

Considering that Chile's Economics Minister Sergio 
de Castro and Central Bank President Pablo Barahona 

256 The Ugly Truth About Milton Friedman 

were personally trained by Friedman at the University 
of Chicago, Friedman's disclaimer is astonishing. The 
truth is that Friedman took a more extreme stand on 
cutting consumption than any of the military junta. 
When he traveled to Chile in early 1975, when the 
country was at the absolute nadir of economic collapse, 
Friedman "chided the Chileans for not cutting their 
spending enough." 20 

He did more than make such demands in private; he 
issued them in the Spanish-language public press in 
Latin America. In one particularly egregious example, 
he warned the Chileans not to take any measures to 
relieve the genocidal conditions of mass impoverish- 
ment brought on by his economic policies: 

"Whenever social programs either in the United 
States or in Chile have been initiated on the basis of 
'helping the poor,' they have ended up hurting the poor 
and helping middle and upper income people. It is not 
possible to maintain healthy prosperity by this route. I 
challenge you to examine the experience of the history 
of other countries; there is no country in the world that 
has obtained wide-scale and sustained economic im- 
provement, except through the mechanism of the pri- 
vate market economy. . . . We must not be equivocal: 
the end of inflation will not be achieved without 
costs." 21 

He continued in the same essay: "I have been in- 
formed that the government of Chile had adopted many 
measures which are in agreement with the orientation 
that I affirm and defend. It has been a force for the 
return of economic activity to the private sector. It has 
taken measures to reduce government expenditures and 
the government deficit. ... All this is positive, I am 

The Worst Economist in the World 257 

Industrial category 



Consumer goods: 



Transport equipment 



Construction materials 



Other manufactures 



* 1968 = 100 on index 

confident that Chile will have the courage, the strength 
and the wisdom to accelerate this process and to get 
past this initial difficult period." So much for Fried- 
man's hypocritical attempt to distance himself from the 
junta's malnutrition economics. 

The statistics for Chile's economic performance tell a 
horror story. All categories of consumables produced 
domestically fell by drastic amounts. Food imports — on 
which Chile is still dependent—fell from $500 million in 
1974 to $300 million in 1977, while domestic food 
production declined. The table above shows the state of 
the industrial production index in 1972 before the coup, 
and in 1977 after the junta had been in power for four 

Unemployment, which in 1977 had reached 20 per- 
cent officially and more than 40 percent by unofficial 
calculations, was still 14 percent (officially) in 1978, and 
22 percent by University of Chile estimates. Gross 

258 The Ugly Truth About Milton Frie dman 

Domestic Product never recovered from the 13 percent 
fall that occurred during the worst year, 1975. Real 
wages fell during 1974 to barely half their 1971 level, 
and are still a full third below the 1971 level. By the 
1978 harvest, agricultural production was off by 27 

The one "success" of the Chicago Boys was to reduce 
government expenditure from 15.8 percent of national 
consumption in 1972 to 12.1 percent of national con- 
sumption in 1977, a figure that understates the real 
decline, because total consumption fell sharply over the 
period. However, the decline in the budget deficit was 
achieved by laying off millions of state employees, 
nearly eliminating public health and education services, 
and by auctioning off 454 enterprises owned by the state 
at about 10 cents on the dollar. 

By 1979, the New York financial magazine Institu- 
tional Investor reported that "Chile had firmly moved 
back into the good graces of the international 
bankers." 22 A consortium of New York banks provided 
the junta with a giant $370 million loan, the largest the 
country had ever received, strictly for stretching out the 
country's mammoth debt. All was well, the magazine 
said. "De Castro [Chile's minister of economics and a 
student of Friedman's], a polite, soft-spoken, tennis- 
playing 48-year old economics professor, is a cult figure 
in Santiago. Devotedly admired by his followers, he is 
at the same time widely regarded by his detractors as an 
extremist every bit as morally committed, and perhaps 
as dangerous, as his communist predecessors a few 
years ago. The de Castro economic policies have their 
spiritual roots in the so-called Chicago School of eco- 
nomic thought pioneered by Nobel Prize-winning econ- 

The Worst Economist in the World 259 

omist Milton Friedman. In fact, one Chilean critic of 
those policies, successful banker and industrialist Or- 
lando Saenz, cracks that 'what's happened here is as if 
Jimmy Carter had appointed Milton Friedman and then 
left him to get on with the economy just as he 
pleased.' " 2 > 

Institutional Investor published this encomium in 
March 1979, six months before Jimmy Carter and Paul 
Volcker did precisely that. 

The magazine, which writes for a select audience of 
international bankers, was nonetheless cautious in its 
praise. It quoted a "prominent industrialist" warning: 
"It's not that Sergio de Castro is politically insensitive. 
It's just that he isn't a politician. He thinks that politics 
is irrelevant. But he and his friends wouldn't last a 
minute if you took away Pinochet's bayonets. These 
kids' schemes always last exactly as long as the dictators 
behind them." 

Chile remains on the verge of both financial col- 
lapse — a wave of bankruptcies shook the Chilean finan- 
cial sector during 1979 — and political upheaval. 

For the moment, however, the near-doubling of the 
price of copper on the international markets has enabled 
Chile to cover its $1 billion annual oil import bill. This 
has given the country at least some of the trappings of 
prosperity, the New York Times reported on February 
24, 1980: 

"After a major riot here at the overcrowded central 
jail, which embarrassed Chile's law-and-order regime, 
President Augusto Pinochet ordered the immediate 
construction of a new prison, the first since 1893. 'The 
work will begin tomorrow morning,' said the executive 
decree ordering construction of the $20 million jail. The 

260 The Ugly Truth About Milton Friedman 

sense of urgency reflects both sensitivity to social criti- 
cism by opponents of the regime and a new ability to 
pay for public investments." 

That is the first fruit of Milton Friedman's Chilean 

Friedman in Israel 

Unlike his proud attitude toward Chile, Friedman 
avoids talking about his role as chief economics adviser 
to Israel's now-failing Begin government, which began 
the week after Begin was elected in the spring of 1978. 
It is hard to say at this writing which will go first: Begin 
or the Israeli currency. Now suffering an annual rate of 
inflation of over 200 percent a year and devalued on the 
international markets by several percent per month, the 
Israeli currency of legal tender since independence is 
scheduled to be withdrawn from circulation in Septem- 
ber 1980. At that time, the battered Israeli lira will be 
traded in for a new Israeli "shekel" at ten shekels for 
every lira. 

The Israeli government, after two years of Milton 
Friedman's economic program, does not have much 
choice but to call in the old money and issue new. From 
1978, when Begin invited Friedman to Jerusalem for 
consultations, to February 1980, inflation tripled. Be- 
gin's first finance minister, Simcha Ehrlich, took Fried- 
man's advice and eliminated government subsidies and 
price controls on consumer goods, producing a 25 
percent across-the-board price increase. In a country 
where a cheap two-bedroom apartment costs $50,000, 
and a small car costs $16,000, that was a brutal exercise. 
It provoked a short-lived general strike by the Israel 

The Worst Economist in the World 261 

Labor Federation, which is controlled by Begin's Labor 
Party opponents. 

Ehrlich lasted barely a year. In the fall of 1979, Begin 
dumped the unpopular minister for Yigal Hurvitz, 
because of "the finance minister's inability to make any 
dent in the inflation Figure, and [because of] the gaping 
balance of payments deficit created by his own policy," 
the London Financial Times's World Business Weekly 
reported April 14, 1980. Hurvitz's prescribed medicine 
was more of the same Friedman formula, according to 
World Busines Weekly: "tight credit restriction, sav- 
agely pruned subsidies on basic consumer items, warn- 
ings of unemployment, and a promise of a no-growth 

Hurvitz fared as badly as Ehrlich had before him. 
"The stagflation such policies produced made no one 
happy," World Business Weekly said. "But even worse 
was the Hurvitz failure to keep government spending 
down. Despite heroic efforts to cut government spend- 
ing in the 1980-81 budget, a 6 percent reduction in the 
social ministries was wiped out by a 9 percent rise in 
local defense spending. Domestic government spending 
will rise by 4.5 percent this year." 

With Friedman as his adviser, Begin has transformed 
Israel into a model Schachtian state, where military 
expenditures consume one third of all government 
expenditures. The nightmare of the Zionist movement 
is that Begin will adopt Goebbels's solution to the 
Schachtian economic paradox. Despite the savage cuts 
in social expenditures under his government, Begin has 
had to increase military expenditures even further, 
pushing Israel into hyperinflation. Since debt service 
already consumes one quarter of the Israeli budget, 
Begin's failure to find a peace settlement, or rather his 

Figure 3 

Israeli Exports and Imports 

1977 Exports: $5.68 billion 

1977 Imports: $8.37 billion 

jnsumer goods 


Trade deficit 

1977 . . . $2.69 bil. 
1976 .... 1.70 bil. 
1975 . .. .2.20 bil. 
1974 . .. .2.37 bil. 

Source: Ampal-American Israel Corporation 

Figure 4 
Israel's inflation 









Figure 5 
Israel's balance of payments 












■ ■ 



i . ; . 



t accc 

ions 3 



1970 72 




79 80 

264 The Ugly Truth About Milton Friedman 

attempt to use the Camp David agreement with Egypt 
as flank-covering for an overt territorial expansion 
policy on the West Bank and possibly into Lebanon, 
has produced the same results that Schacht's policies 
did in the great 1938 crisis. 

Friedman's role in the matter is somewhat ironic, 
because Israel's hidden source of export strength — the 
compensation for the greatest military and debt-service 
dependencies of any country in the world — is a special 
kind of old-fashioned "free trade." More than one third 
of total Israeli exports is polished diamonds, a business 
established by emigres from South Africa and encour- 
aged by De Beers, the Oppenheimer cartel that controls 
85 percent of world diamond marketing. Marketed 
through Amsterdam, Antwerp, and New York, the 
diamond trade is not only the most secretive of any 
major commodity — all transactions in the diamond 
exchanges are verbal and unreported — but also the most 
untraceable. Next to pure, refined heroin, diamonds are 
the most easily concealed high-value medium of ex- 
change, and about half the trade in diamonds runs into 
illegal channels, including those of the narcotics trade. 
That fact is surprising only out of context. Consolidated 
Gold Fields of South Africa estimates that half of world 
gold production as well flows into illegal operations. 24 

In addition, an estimated 15 percent of Israel's ex- 
ports are armaments; the actual figure, possibly higher, 
is a well-kept secret. Apart from the Israeli-made Uzi 
submachine gun, used by Pinochet's troops in Chile and 
favored by many Latin American dictatorships for its 
high rapidity of fire, Israel also exports homemade 
imitations of American fighter aircraft, recoilless rifles, 
and surface-to-air missiles to those countries that find it 

The Worst Economist in the World 265 

uncomfortable to purchase weapons directly from either 
the United States or Western Europe, including South 
Africa and the Soviet Union. Until 1979 Israel's biggest 
customer in Latin American was dictator Anastasio 
Somoza, whose military forces were largely Israeli- 
equipped. For example, the Gabriel sea- to-sea missile, 
the Shafrir air-to-air missile, the Kfir jet fighter, and 
other weapons that Israel markets internationally are all 
spinoffs of American designs. Because some of the sales 
are made possible by Israeli pirating of designs, patents, 
and imported components from the United States — 
something that is forbidden under U.S. military aid 
agreements — the trade must be kept quiet. 

In addition, some of the leading Israeli arms manu- 
facturers, like Israel Aircraft Corporation founder Saul 
Eisenberg, who works out of Hong Kong with financ- 
ing from Standard Chartered Bank, deal in other coun- 
tries' arms as well. 

The official Israeli estimate is that such sales amount 
to $320 million annually, but Aviation Week and Space 
Technology estimates that the figure is closer to $1 
billion. 25 That is a substantial sum, particularly for a 
nation whose balance of payments deficit has risen from 
less than $1 billion in 1972 to an estimated $5 billion for 

The British disease catches 
the Friedman cure 

Early in 1980, Milton Friedman received a triumphal 
welcome in London from Margaret Thatcher's Conser- 
vative government, including a visit in February to 10 

266 The Ugly Truth About Milton Friedman 

Downing Street and British public television screenings 
of his American-made series, "Free to Choose." A year 
previously, at the end of April 1979, Margaret Thatcher 
came to power with the promise that she would deal 
with Britain's chronic inflation by application of Fried- 
man's methods of monetary control. 

There is a great deal of theater in this discussion. 
After all, how can one blame poor Milton Friedman for 
anything the British do? They invented monetarism, 
both the Ricardo and Alfred Marshall varieties. For 
that matter, they invented the University of Chicago. 
Nonetheless, Milton Friedman has been adopted by the 
British government of Thatcher, Industry Minister Sir 
Keith Joseph, and Chancellor of the Exchequer Geof- 
frey Howe as its official adviser, and Friedman has 
acknowledged his role enthusiastically. Therefore, we 
are within our rights to enjoy Friedman's discomfiture 
at the disastrous turn economic events have taken in 
Britain since his policies were put into practice. 

A year after Thatcher's election, the Bank of England 
had, indeed, brought money supply growth down from 
more than 15 percent per year to a mere 7 percent per 
year, at the direction of Mont Pelerin Society members 
Geoffrey Howe and his deputy, John Biffen. The result 
was not merely the opposite of what they and Milton 
Friedman had predicted, but the opposite by such a 
wide margin as to make British economic management 
the laughing stock of the industrial world — and it takes 
extraordinary events to get people to laugh at new jokes 
about the British economy. 

In that year, the rate of inflation rose from 6 percent 
a year to 22 percent a year; the industrial production 
index fell by 10 percent, or from 108.2 to 98.1 (on a 

The Worst Economist in the World 267 

% Change in 


% Change 



in prices* 


-8'/ 2 


United States 


+ 14'/ 2 

West Germany 





+ i3y 2 


+ 18"/ 2 


* Year to April 1979 

scale 1975=100), down to the trough-level of the 1975 
world recession; official unemployment rose from 5.6 
percent to 6.1 percent of the employed workforce; and 
interest rates nearly doubled to over 20 percent. 

The British disaster is not only devastating in its own 
terms, but utterly unique among industrial countries, 
none of whom, except the United States, has applied 
Friedman's methods. The performance of the leading 
industrial countries in the past year is given by the table 

Even the United States, subject since October 1979 to 
Friedmanite monetary policy, has done better than 
Britain. When the American economy fell off a sharp 
edge in late March 1980 following Federal Reserve 
Chairman Paul Volcker's imposition of strict credit 
controls, at least interest rates fell with the production 
indices. Dollar interest rates have fallen between early 
April and July 1980 by about half on the short-term 
side, that is, from 20 percent for overnight interbank 

268 The Ugly Truth About Milton Friedman 

loans to less than 10 percent. British interest rates, 
despite a much sharper drop in credit demand with a 
much steeper falloff of production, have hardly fallen 
from the stratospheric range of 20 percent. 

Even Milton Friedman's friends in London have 
begun to turn on him, which is somewhat unfair, since 
they put him and his school in business in the first place. 
The London Economist, the century-and-a-half-old Brit- 
ish weekly now published by Evelyn de Rothschild, 
complained April 26, 1980, "Britain is not winning its 
fight against inflation." 

"A year ago next week," wrote the Economist, "Mrs. 
Thatcher's government was elected with the firm belief 
that strict monetary control would be the long-run cure 
for Britain's endemic inflation. With wage and price 
inflation both around 20 percent, confidence has sub- 
sided to the point where honest and unremarkable 
reservations by a treasury minister have been uproari- 
ously greeted by open revolt. 

"All that poor Mr. John Biffen admitted this week 
was that there is no God- or Friedman-given 18-month 
lag between a slowdown of money growth and a drop 
in inflation. Sir Geoffrey Howe said as much months 
ago. . . . But there has, just the same, been a change for 
the gloomier in ministers' view of how the fight against 
inflation is going to work out. . . . 

"Nor will the medium-term plan for a monetary 
slowdown to 4 to 8 percent, unveiled with the [March] 
budget, cut much more ice. The economic forecast at 
the other end of the little red budget book is an open 
admission that the monetary restraint will bear harshly 
on output, and only sluggishly on inflation, this year." 26 

The Worst Economist in the World 269 

Britain's experience with Friedmanism is no accident, 
but a repeatable experiment. Money supply is not an 
interesting parameter. To understand inflation, we must 
look at two processes: the growth of total debt and 
equity capitalization in the economy, and the rate of 
growth of real tangible output. The economy's real rate 
of profit is not a mere aggregation of the profits of 
individual firms. If it were, the Chicago School's con- 
tentions would be true that real profit does not exist 
and that the profits of individual firms represent the 
mere chance distribution of income according to an 
uncertainty principle. The real rate of profit must be 
measured in terms of society's production of tangible 
wealth in excess of the requirements of maintaining the 
population at existing living standards, and maintaining 
existing productive plant and equipment at prevailing 
technological levels. 

When the rate of growth of nominal claims on 
income, through debt service, dividends, and rents, 
exceeds the rate of growth of real profits in the econ- 
omy, the result is inflation; the wholesale price of 
tangible goods must be increased to cover the additional 
income demands. The official rate of inflation, as meas- 
ured, for example, by the consumer price index, will 
vary somewhat from this basic underlying inflation rate. 
Monetary inflation will produce speculative booms in 
the commodities markets, cartels may bid up the price 
of oil or other essentials, and the results will be trans- 
mitted through the economy's entire price structure. 
But the secondary forms of inflation only become a 
significant problem when the economy's credit process 
and production process are out of phase. 

270 The Ugly Truth About Milton Friedman 

The "normal" condition of an industrial economy is 
a long-term trend toward lower prices, due to higher 
productivity through the introduction of new technolo- 
gies. This is sectorally the case even in the American 
economy, where the cost of computer data-processing 
fell during the 1970s, on average, by 50 percent per 
year. We can say, in general, that prices will fall 
whenever the rate of increase of productivity is higher 
than the cost of credit or equity required to employ 
additional labor at the new, higher level of productivity. 

In an industrial economy, the rate of increase in 
productivity and the cost of debt service are not inde- 
pendent variables, but mutually reinforcing conditions 
of the total economic process. We see in Figure 6 how 
sharp the divergence between the productivity growth 
rate of the American economy and the rate of increase 
of debt has been. The growth of the area between the 
two lines measures the underlying rate of inflation. 
Inflation leads to higher interest rates — because credi- 
tors demand the addition of the inflation rate to their 
yield on lent money. Higher interest rates penalize 
capital investment in industry more than any other form 
of economic activity, because of longer investment lead- 
times. Inflation itself reinforces the negative tendency 
toward investment in services rather than goods-pro- 
ducing industries, in a self-feeding cycle. 

At the point of economic breakdown, the self-feeding 
rise in inflation accelerates toward hyperinflation. That 
is the substance of the past year's developments in 
Britain. The British economy is so depleted that the rise 
in interest rates authored by the Thatcher government 
not only wiped out capital investment but cut the 
profitability of a huge chunk of Britain's manufactur- 

Figure 6 
Productivity and total debt 

Percent rate 
of increase 

Net government 
and private debt 


$ billions 







1955 60 65 70 75 78 

272 The Ugly Truth About Milton Friedm an 

ing. British Steel was the first to go, for rather evident 
reasons; this is the national steel sector that in 1975 
closed down the Bessemer furnace, first built by Dr. 
Bessemer a century ago! The Thatcher government laid 
off 60,000 workers from the nationalized steel sector, 
provoking an extended, bitter strike that lasted through 
the winter and into the early spring of 1980. 

Overall, domestic costs in manufacturing in Britain 
rose by 20 percent in the past twelve months. The Bank 
of England predicted in September 1979 that "industrial 
companies may be faced with a financial squeeze as 
severe, if not as abrupt, as in 1974-75. Falling consumer 
sales have hurt them badly. In addition, the interest and 
exchange rate structure of the pound sterling have made 
it impossible for British companies to market abroad, 
producing a $7.3 billion trade deficit in the past year." 
The pound sterling is currently worth about $2.30 on 
the foreign exchange market. It is vastly overvalued, 
according to London Times editor-in-chief William 
Rees-Mogg. Rees-Mogg calculates that sterling, meas- 
ured by how much productivity investment in Britain 
will buy, is worth only $1.60, or barely two thirds its 
market value. 

Nonetheless, the Bank of England maintains artifi- 
cially high interest rates in order to attract international 
"hot money" to London, where it can get the highest 
rate of return in the world on very short-term invest- 
ments. It uses this short-term money to finance Britain's 
budget deficit, which Sir Geoffrey Howe has been trying 
frantically (and unsuccessfully) to cut. Without this 
artificial prop, the entire structure of British govern- 
ment debt would come crashing down, as surely as it 

The Worst Economist in the World 273 

did in 1798, when Prime Minister William Pitt hired 
Parson Malthus to justify the repeal of the Poor Laws. 

British industrial companies are losing money. The 
London Economist estimates that the deficit of manu- 
facturing companies will rise to £5.1 billion in 1980 
from £2.2 billion in 1978 and £4.3 billion in 1979, and 
that the minimum the companies must borrow in 1980 
will rise to £7 billion — almost as much as the govern- 
ment's own borrowing requirement — from £2.5 billion 
in 1978 and £5.9 billion in 1979. 27 

The result, predictably, is a scramble to raise prices. 
All that Milton Friedman's money crunch has accom- 
plished is to drive up the cost structure of industry, 
including pay increases to workers (who are not keeping 
up with inflation in any case), and to force the inflation 
spiral ever upwards. 

Of course, continued application of monetary auster- 
ity will ultimately produce a lower rate of inflation, as it 
did in Chile, in the same way that holding an influenza 
patient's head under water will ultimately cure influ- 
enza. General bankruptcy — Friedrich von Hayek's ex- 
plicit proposal — will reduce the demands for income in 
the victim economy by wiping off the books masses of 
equity and debt capital. The assumption is that a chain- 
reaction will wipe out more paper than production, and 
therefore bring prices down. That is one way to do 
things. The consequences of this method, however, led 
not only to the Great Depression but to World War II. 
Von Hayek's proposal is death — on a mass scale. 

In summary, it can be said that in the last ten years, 
between his tenure at the Nixon White House and his 
role as Britain's chief economic adviser, Milton Fried- 

274 The Ugly Truth About Milton Friedman 

man has attached his name to more economic disasters 
than anyone since the East India Company gang around 
Jeremy Bentham. The Nobel Prize committee must have 
been drinking nitroglycerin when they gave him the 
award in 1976. If awards were given out for it, Friedman 
would be first choice for "World's Worst Economist." 


Basis of 

Real Economics 


To cherish and stimulate the activity of the human 
mind, by multiplying the objects of enterprise, is 
not among the least considerable of the expedients 
by which the wealth of a nation may be promoted. 
— Alexander Hamilton, Report to Congress on 
the Subject of Manufactures, 1791 

Now that we have dispensed with the hoax that Milton 
Friedman misrepresents as economics, the real work 
begins. Friedman has survived in the profession this 
long because the public and its leaders are ignorant of 
the ABCs of real economics. At this juncture, this 
ignorance is as dangerous to America's welfare and the 
world's as Friedman's deliberate misinformation. Noth- 
ing less than a renaissance of economic science will save 
this country from devolution into a futureless condition 
like that of Great Britain. 

To start with, most of the theoretical baggage of 
Friedman's National Bureau of Economic Research has 
to go if we are to find a direction out of the present 

276 The Ugly Truth About Milton Friedman 

crisis. At the outset we emphasized that the single 
defining measure of economic performance was man's 
capacity to command nature. This can be expressed as 
the rate of increase of the productivity of labor, or more 
broadly as the rate of assimilation of new technology 
into the economic process. This criterion immediately 
tells us why such measures as "Gross National Product" 
are confusing absurdities. 

Gross National Product is the sum of all goods and 
services sold over a given period of time. But what effect 
do these sales have? GNP registers a boom in building 
gambling casinos no differently than a boom in building 
steel mills. If, as Milton Friedman proposes, we legal- 
ized and taxed the narcotics traffic, GNP would imme- 
diately rise by $100 billion. If we legalized criminal 
activities such as prostitution and the numbers racket, 
which Friedman also approves, it would rise by another 
$100 billion. 

The problems of GNP measurement include some 
less obvious, but much more dangerous, failings. It is a 
useful first step to consider the reasons a "zero techno- 
logical growth" economy is impossible. In other words, 
any effort to impose neo-Malthusian limitations to 
technological growth on a modern economy must send 
that economy into a hyperinflationary sort of collapse. 

In the final analysis, there is no limitation on the 
resources available to man on earth or in the universe. 
For example, fusion energy technologies lead us to 
virtually unlimited, cheap energy. With advanced fusion 
technologies, about a cubic mile of the earth's crust 
contains all of the mineral resources mankind presently 
requires in a year. The limitation on resources is strictly 

The Basis of Real Economics 277 

a matter of the level of productive technology mankind 
is currently using. 

However, for any one fixed level of technology or 
production, certain kinds of all the available resources 
(minerals, for example) are economical resources. As we 
proceed to technologies at a higher average level of 
energy flux density, kinds of ore that are unusable to 
societies on a lower level of technology become cheap, 
and for a while abundant, new resources. This indicates 
that to maintain a society even at a constant level of 
productivity, a certain rate of progress in applied pro- 
ductive technology is required. Otherwise, the cost of 
marginal resources will increase, rising at an accelerat- 
ing rate, as the depletion of presently economical kinds 
of resources proceeds. 

That is why any economy that adopts a practice of 
relatively low rates of technological progress must 

If there are still any competent high schools in 
existence in the United States, every qualified graduate 
is acquainted with the introductory physics and chem- 
istry textbook discussion of "reducing power." Such a 
student can easily understand the next point. 

The question of what grades of potential ore are 
economical for society is essentially a matter of the level 
of energy-intensity of the average productive technol- 
ogy in use by that society's economy. This rise in the 
"reducing power" of the society's productive technol- 
ogy means an increase in the amount of energy available 
per capita. It means something more. There must also 
be an increase in what is termed the "energy flux 
density" of basic modes of productive technology in 

278 The Ugly Tr uth About Milton Friedman 

general usage. We measure reducing power in terms of 
increases in the energy flux density of society's produc- 
tive technology. 

But from the standpoint of GNP accounting, there is 
no distinction between output at the existing technolog- 
ical level and output at improved technological levels. 
Yet, at the point where a given resource becomes scarce, 
all the technology associated with it becomes worthless, 
and will precipitously "fall out'* of GNP when no use is 
found for it. Those technologies that have been defined 
into being new resources — for example, fission and 
fusion nuclear power, replacing the consumption of 
fossil fuels for power production — will retain value. 

These considerations define our choice of economic 
paths for the future. A synthetic fuels plant, which 
demands an effective per barrel oil price of double the 
present world market level, may make the same contri- 
bution to GNP as a nuclear power plant, which can 
deliver electricity at a fraction of the cost. Because the 
synthetic fuels plant is several times less productive than 
the nuclear power plant, its construction is a net loss. 
We require an entirely different set of yardsticks capable 
of telling us whether different policy alternatives will 
get us where we must go. 

We earlier divided the economy's product into the 
cost of labor, or V; the cost of maintaining existing 
capital stock, or C; gross surplus above these costs, or 
S; nonproductive economic overhead expenses, or d; 
and net investible surplus, or 5". As "scalar" quantities, 
that is, as fixed aggregates of goods, these terms are less 
absurd than Gross National Product, but they are still 
entirely inadequate. Under conditions of technological 
progress, the value of a week's productive labor by an 

The Basis of Real Economics 279 

average member of the labor force in one period is not 
comparable to a week's productive labor in either earlier 
or subsequent epochs of the ongoing economic process. 
The capital stock's value and current maintenance re- 
quirements are also entirely contingent on the rate of 
technological progress. What is the value of a buggy 
whip factory after mass production of automobiles 
takes off, or the value of a vacuum type factory after 
the mass production of the transistor? 

The problem that has bedeviled the standard aca- 
demic "production functions" is that they attempt to 
measure technology in terms of parameters that are 
themselves changed by technology. No matter how many 
bits and pieces of labor-input, hours worked, invest- 
ments made, and other such measures the National 
Bureau of Economic Research collects, it would come 
no closer to a solution of this problem. 

However, if we start from the effect of rising labor 
productivity on our initial categories, instead of taking 
fixed aggregations of goods or hours worked as our 
starting point, we have the beginning of a solution. 

We know that rising labor productivity is associated 
with a rising ratio, S'/(C + V), that is, a greater amount 
of investible surplus compared to the maintenance 
requirements of the capital stock and the labor pool. 
This ratio is the basic accounting measure of competent 
economics. It tells us whether the economy is producing 
sufficient "free energy" to meet the investment require- 
ments in new technology and new labor skills that we 
require. Without the production of such investible sur- 
plus, the economy would function only at its existing 
technological level, and would ultimately collapse 
through a resource-scarcity crisis. If the ratio is nega- 

280 The Ugly Truth About Milton Friedman 

tive, that is, if the economy is producing less tangible 
output than is required to meet its own maintenance 
requirements, the economy is in crisis. 
' The American economy is now undergoing that 
negative growth, as the two graphs generated by the 
LaRouche-Riemann computer model demonstrate (Fig- 
ures 7 and 8). 

In addition, we can specify the following further 
conditions for rising labor productivity: 

1. The real content of the average wage, or V t must 
rise — a correlative of the increase in the education and 
cultural level of the productive labor force. 

2. C/V must rise, that is, the average worker will 
command more capital in the production process. 

3. S/(C + V), or gross surplus compared to the 
economy's maintenance requirements, must also rise. 
That is to say, the economy's expenditures on such 
overhead functions as research and development, edu- 
cation, music, and other requirements for enhanced 
labor productivity must rise along with the surplus 
product invested in expanded production. 

4. S/(C + V) must rise more rapidly than d/(C + V), 
so that the ratio S' '/(C + V) also rises. 

The limitations of measuring S', C, V, and d in 
constant-dollar terms are obvious, since these values 
may reflect erroneous policy decisions. For example, in 
price terms, the agricultural sector is operating in net 
deficit; yet it is demonstrably one of the economy's most 
productive sectors. This apparent deficit is unrelated to 
the agriculture sector's performance in real terms. It 
stems from Carter administration policies that have 
held farm prices down, while letting the cost of farm 

Figure 7 

Reinvested profit since 1970 


Figure 8 
Free-energy ratio of the U.S. economy since 1970 


282 The Ugly Truth About Milton Friedman 

inputs rise spectacularly, thus inflating the cost of farm- 
sector V and C. 

Therefore, another universal measure is required as a 
corrective, putting us much closer to a physical-science 
grasp of economics. The total energy throughput of the 
economy must be calculated, and the relative energy 
costs of S, C, V, and d must be computed as a 
distribution of this total energy throughput. 

We have now established sufficient criteria to chart 
the path of an economy. We introduce the awesome- 
sounding term hydrothermodynamics to describe the 
overlap between the study of economic processes and 
the achievements of Hermann von Helmholtz and Bern- 
hard Riemann in mathematical physics. What the term 
signifies is not so difficult to comprehend: In the sense 
of thermodynamics, we examine the economy's behav- 
ior at any point in time the same way we use the 
thermodynamic equations to measure efficiency of an 
engine producing work through compression of gases. 
However, the size and shape of the engine — that is, the 
economy — are themselves changing as it operates, 
through the introduction of new technologies. Hydro- 
dynamics is the branch of mathematical physics that 
concerns the movement of fluids through space; ther- 
modynamics concerns the behavior of systems under 
changing temperature. Virtually all important problems 
in physics affect both parameters, giving us the term 

In a thermodynamic system, what is important is not 
the pressure, or amount of heat, or other absolute 
measure. What a scientist wishes to know about a steam 
engine is its efficiency, that is, the ratio of work done to 
heat lost to the outside atmosphere, the constant that 

The Basis of Real Economics 283 

describes what increase in pressure will cause a given 
amount of volume compression, and what temperature 
is required for the system to operate efficiently. The 
"phase space" in which a steam engine operates is 
created by the totality of these parameters; it produces 
a given amount of work with a certain volume of heat 
loss, at a given pressure and volume, at a certain 

We measure the behavior of an economy in the same 
way. The ratios we described above, both in constant- 
dollar and energy distribution terms, are the equivalent 
of thermodynamic "phase" variables. Neither the abso- 
lute values of S', C, V, and d, nor the individual ratios 
as such, provide us with an accurate measurement. But 
the four ratios together define a "phase space," through 
which we can measure the economy's trajectory. 

By reference to a "phase diagram" for the behavior 
of a gas under pressure available in any high school 
physics textbook, we can make this accessible to the 
nontechnical reader. An "ideal gas" follows Boyle's 
law, that is, its pressure multiplied by its volume are 
constant at a given temperature (Figure 9). In other 
words, any increase in pressure will reduce the volume, 
and vice versa. In the standard phase diagram, pressure 
is shown on the vertical and volume on the horizontal 
axis; lines of constant temperature, or isotherms, form 
a family of hyperbolae. 

We can describe an economy as a force, like pressure, 
acting through a medium, like volume: a given amount 
of labor acting through a given capital stock at a 
specified productivity. Temperature, which in thermody- 
namics is the efficiency measure of the system, is the 
economy's rate of realized technological progress, or the 

Figure 9 
Phase diagram for an economy 

By the same reasoning that underlies classical thermo- 
dynamics, it can be shown that an industrialized economy 
follows laws similar to those of a gas under pressure. Volume 
corresponds to the size of the labor force, measured by our 
"variable capital"; pressure corresponds to the input of capital 
at a specified productivity. 

The "temperature" of the economy is the most important 
consideration. In gas dynamics, the temperature defines the 
efficiency with which the system produces work rather than 
waste heat. In economics, the equivalent of temperature is the 
rate of depreciation, or the rate at which old capital is replaced 
by new. 

As in the case of a gas, lowering the depreciation rate 
corresponds to "cooling off the economy, a process that can 
go on only so long before a "phase change" occurs, compa- 
rable to the liquefaction of a gas — known as depression. 

The above diagram shows the standard physics-textbook 
diagram for a real gas. The inset shows in greater detail the 
dynamics of the phase change. It is known that some gases 
can be cooled below their normal condensation point. In this 
case, the lines of constant temperature on the phase diagram, 
or isotherms, do not behave normally, that is, pressure will 
rise despite a rise in volume, contrary to the classical inverse 
relationship between pressure and volume. These contradic- 
tory phenomena are associated with the point just before a 
phase change occurs. In the case of the economy, this property 
characterizes the situation immediately prior to a depression 

The Basis of Real Economics 285 

rate at which old capital equipment is replaced with new: 
the rate of depreciation. These are "phase variables" 
defined geometrically as a "phase space." We examine 
the trajectory of a process through a geometry defined 
by the variables that properly characterize it. 

We now measure the ratio-rates of change in both the 
four parameters and the values of S' corresponding to 
the transformations of the phase space defined by the 
four parameters of rates of change. 

The resulting determination of the characteristic val- 
ues of 5' in that phase space states the problem of 
economic policy analysis in the terms of reference of the 
hydrothermodynamics of Helmholtz. 

That defines the physical hydrothermodynamics of 
economic analysis. 

The causal element "driving" the transformations 
proves to be advances in technology. Those advances 
are measured in terms of not merely the simple energy 
flux density, but rather negentropy flux density. 

If F(E) defines energy flux density pure and simple, 
then the corresponding ratio, distributing F(E) over S', 
C, and V, defines a ratio corresponding to S'/(C+V). 
The rate of increase of that derived ratio measures 
negentropy as negentropy flux density. 

The corresponding measurement of progress in basic 
science and derived advances in productive technology 
is the correlated increase in the negentropy flux density 
of society. 

In mathematical physics, this corresponds to the 
physical geometry outlined by Bernhard Riemann in his 
1854 habilitation dissertation concerning "The Hy- 
potheses Which Underlie Geometry." 

The kind of physical geometries that correspond to 

286 The Ugly Truth About Milton Friedman 

the principles of that habilitation dissertation has the 
following broad distinctions: 

1. It defines a nested, causally interconnected mani- 
fold of phase spaces, such that the characteristic princi- 
ple of physical action peculiar to one phase space differs 
from the characteristic principle of action in the others. 

2. The phase spaces of such a manifold are counted 
in terms of their respective characteristics, denoted 
symbolically by the form n+1, n+2, n+3, and so forth. 

3. That counting is ordered, such that each phase 
space so denoted is relatively degenerate with respect to 
the phase space that succeeds it. 

4. The ordering of phase spaces is subsumed by a 
higher-order characteristic (relatively transfinite), asso- 
ciated with the characteristic action of n+1. That is, 
acting on any phase space of a characteristic denoted by 
n, the direction of action on phase space n is the 
emergence of a phase space of order n+1. 

5. Therefore, as we encounter those regions of action 
in which n goes over into n+1, or the converse, the 
causal relationships associated with the higher-order 
principle [n+1], or N, determine the outcome of action 
in the one phase space in effects on the others. However, 
the characteristic principle of action peculiar to one 
does not determine (for example, mathematically) the 
effect in the other. 

The higher-order characteristic of the manifold as a 
whole — [n + 1] or N, the relative transfinite for the 
characteristics of all the included manifolds — is the 

The Basis of Real Economics 287 

physical-geometric correlative of the negentropy flux 
density we have designated for economic analysis. 

The physical hydrothermodynamic domain defined 
for the study of the transformation of economic pro- 
cesses is a Riemannian multiply-connected manifold. 

The study of the development of singularities and 
emergence of new phase spaces in economic processes 
corresponds to Riemannian "shock wave" physics in a 
matter analogous to Erwin Schrbdinger's derivation of 
the de Broglie-Schrodinger analysis of the internal 
geometry of a "wavicle," and the related de Broglie 
prediction of the appearance of "solitons" and related 
phenomena. 1 

How the LaRouche-Riemann 
model works 

The LaRouche-Riemann computer model employs the 
four ratios we described earlier to follow the trajectory 
of an economy or economic subsector. Its initial data 
base is the economy's tangible output. From this, it 
generates the ratios S'/fC+V}, S/V, C/V, and the 
depreciation rate. In the case of a multisector model it 
also calculates the distribution of tangible product 
through the different sectors in terms of sectoral sur- 
plus, C, V, and d, and the same ratios for each sector. 

What concerns us is not the absolute values of these 
ratios but their rate of change with respect to one 
another. The computer calculates this rate of change in 
the form of differential equations for each of these 
ratios. The simultaneous solution of these differential 
equations establishes the economy's trajectory over 

288 The Ugly Truth About Milton Friedman 

time. It enables the operator to specify a required 
increase in the productivity of labor and learn the 
volume of investment in C, V, and d — providing that 
the operator can specify what technologies will be 
available in advance. 

It also allows the operator to project the future 
behavior of the economy under different policy environ- 
ments that imply different values for these ratios, and to 
forecast future economic behavior. The authors and 
their colleagues, as noted in the Introduction, success- 
fully forecast the timing and extent of the present 
industrial collapse while other econometricians were 
predicting a "mild recession." 

The simultaneous solution of these differential equa- 
tions also allows the operator to chart the effect of new 
technologies on the economy as a whole. For example, 
if our industrial engineers tell us that a new process will 
double productivity in the steel industry, the LaRouche- 
Riemann model can calculate the effect on the total 
economy. If we wish to know what quantity and quality 
of surplus production we require to achieve fusion 
power by the 1990s, the LaRouche-Riemann model can 
find the optimal investment path to arrive at the speci- 
fied state of the economy. 

This method has already been applied to the econo- 
my of India, with results that have created a world up- 
roar in development politics. Working closely with 
advisers to the Indira Gandhi government in India, the 
LaRouche-Riemann model showed how that economy 
could become an industrial power on the scale of the 
Soviet Union within forty years, or within two genera- 
tions. The model specified the rates of growth in capital- 
intensive irrigation, nuclear power plant building, and 

The Basis of Real Economics 289 

industrial production required to achieve this. At this 
writing, the method embodied in this study is being 
incorporated into the current Indian five-year plan. 2 

In the case of the American economy, the LaRouche- 
Riemann model has also determined where Milton 
Friedman's depression will take us. The results are 
sobering. It shows us that we never really recovered 
from the 1975 recession, and that less than another year 
of Friedmanite policies will destroy the American econ- 
omy's prospects for recovery altogether. By early 1981 
or even earlier, the U.S. economy will be physically 
incapable of producing sufficient tangible wealth to 
meet its bare replacement needs. America will be fin- 
ished as a major industrial power, and will not be able 
to recover except through foreign aid from the stronger 
Japanese and West German economies. 

If the administration's policy to promote Schachtian 
forms of investment continues, the American economy 
will deteriorate even faster. Jimmy Carter or Ronald 
Reagan will crash into the same problem that should 
have toppled the Adolf Hitler regime in 1938: After 
years of misapplication of capital, the economy cannot 
continue producing armaments, let alone necessaries. 

A series of quantitative measurements of the economy 
has been prepared, corresponding to the LaRouche 
method of analysis, to show all this in graphic detail. 

Anyone who has visited an industrial city in the 
United States is struck by the state of deterioration of 
America's basic plant and equipment. Figure 7 meas- 
ures how bad it really is. In constant dollars, productive 
investment has been stagnant for the last ten years, 
shown by the dashed line at the top. The Commerce 
Department deducts from this an inadequate measure- 

Figure 10 
Productive fixed investment 

(billions of 1972 dollars) 



Gross productive investment 







Net productive investment 




The trend of gross investment is taken from the Bureau of 
Economic Analysis estimates adjusted for unproductive in- 
vestment (like office buildings). Net investment is derived by 
adjusting for BEA capital consumption allowance. Real net 
investment is the gross adjusted by the model's capital con- 
sumption allowance. 

The Basis of Real Economics 291 

ment of replacement costs, which fails to take into 
account the huge rise of replacement costs for plant and 
equipment under conditions of double-digit inflation. 
By calculating these costs and including a measurement 
of obsolescence, we show "real net investment," indi- 
cated by the dotted line at the bottom. By 1975, real 
investment was negative $10 billion a year in constant 
1972 dollars. By 1979, it had fallen to negative $50 
billion per year. In other words, America was under- 
investing by a stupendous amount, losing that volume 
of its productive plant every year. 

It should be no surprise that the growth rate of labor 
productivity has fallen from an average 3 percent per 
year during the 1960s to less than 2 percent after 1975, 
and to an annual rate of decline of 10 percent per year 
during the first quarter of 1980. The LaRouche- 
Riemann model calculates that real productivity has 
been falling by 3 percent per year since 1976 — a lower 
estimate than the government's. The reason is that the 
Bureau of Labor Statistics calculates productivity in 
terms of output per manhour. There is a basic flaw in 
this measurement. Workers building a synthetic fuels 
plant, or retooling for antipollution devices, or digging 
holes in the ground and filling them up again, may 
increase their output per manhour. However, their 
output may be entirely useless in real economic terms. 
Instead of this measurement, the LaRouche-Riemann 
model uses the ratio S/V, or the amount of tangible 
surplus produced per employed worker. This measure- 
ment has been falling steadily. 

To these measures of tangible product, we now add 
an energy measurement. Let us look at Figure 11 
showing the energy intensity of the U.S. economy. 

Figure 11 
Apparent energy efficiency in U.S. economy 

Units of mfg. output 












.35 .40 .45 




This graph shows the trajectory of a scalar measure of the 
energy balance in the U.S. economy over the past decade, 
plotting output per man hour against energy use (in million 
BTU) per manhour. 

The Basis of Real Economics 293 

It shows us that between 1954 and 1959, the economy 
expanded its quantitative use of energy much faster 
than the qualitative use of energy increased. In other 
words, energy intensity increased much faster than 
energy flux density. Between 1959 and 1967, under the 
technological spur of the National Aeronautics and 
Space Administration's space program, energy flux 
density, or the qualitative use of energy, increased at a 
faster rate than the mere scale of energy use. After 1967, 
the pattern reverted back to the qualitatively poorer 
circumstances of the period 1954 to 1959. 

However, after 1971, an extraordinary thing oc- 
curred: The economy appears to use less energy while 
still expanding. This appears to violate the first condi- 
tion we set forth, namely, that the total energy through- 
put of the economy must rise. 

This two-dimensional view of things has been 
adopted by the environmentalist-leaning Kennedy Sub- 
committee of the Joint Economic Committee, the De- 
partment of Energy, professors Daniel Yergin and 
Robert Stobaugh of Harvard University, and a host of 
others. They argue that the economy can prosper, or at 
least survive, under conditions of enforced "energy 
conservation," that energy and economic growth have 
"decoupled," that is, are no longer related to each 

Nothing could be further from the truth. If we use 
the method described earlier, the truth emerges. In 
Figure 12 we see a three-dimensional phase space, and 
a trajectory of the economy over time through these 
dimensions. An additional dimension has been added: 
the rate of capital formation (year-to-year change in 
capital stocks). As this trajectory, measured by the 

The Basis of Real Economics 295 

heavy solid line, moves "outward," capital formation is 
rising. We see that capital formation had collapsed 
during the period that the energy efficiency of the 
economy supposedly improved. What the decline in 
energy throughput shows us is that large sections of our 
primary metals and other energy-intensive heavy indus- 
try are being scrapped, in response to the Carter ad- 
ministration's conservation policy. Not only did the 
United States lose physical capacity, but nearly all 
investment was shifted into less capital and energy- 
intensive sectors, away from heavy industry. What the 
Carter administration considers a sign of improvement 
is, in fact, the alarming signs of crisis. 

This is clear if we contrast the American picture with 
the same measurements for the healthier West Germany 
economy (see Figure 13). West Germany's energy use 
increases both in total amount and in efficiency 
throughout the same period. When we consider the 
qualitative aspects of the West German situation, the 
contrast is all the more striking. Because of gradual 
improvements in technology during the past fifteen 
years, West German steelmaking has become twice as 
energy-efficient; that is, its energy flux density has 
doubled. Even so, total West German energy consump- 
tion in manufacturing has continued to rise. The reason 
is that West Germany has oriented its capital investment 
increasingly toward the energy-intensive capital goods 
industries that the United States has neglected. 

How long can America continue doing this? The La- 
Rouche-Riemann computer simulation tells us that we 
are at the end of the road. Figures 7 and 8 showed the 

Figure 13 
Nominal West German energy efficiencies 

Output per manhour in constant marks 




IS i 


J 1974 

25 - / 


J 196% 



10 -*^ 



4.0 6.0 8.0 10.0 

Kg. coal equivalent/manhour 


The Basis of Real Economics 297 

real state of the American economy since 1970, taking 
into account the unmet depreciation costs of industry. 

Figure 7, generated by the computer, shows rein- 
vested profit between 1970 and 1979. Until 1972, the 
economy was rising, with a total volume of $54 billion 
in tangible goods available for reinvestment. After the 
1974 recession, the economy contracted, in other words, 
the quantity of surplus for reinvestment, or S', became 
negative. However, during the entire period of so-called 
recovery, S' hovered about the zero line, and began to 
fall sharply downward in 1979. 

Figure 8 is our "rate of profit," or potential growth 
rate measurement, S'/(C + V). It shows that the U.S. 
economy began the 1970s with a potential growth rate 
of .091, or 9 percent per year, and finished with a 
potential growth rate of zero. That does not mean that 
the U.S. economy cannot grow. Rather, it means that 
the U.S. economy cannot grow at all under present 
investment policies. If we shift investment out of purely 
nonproductive categories such as antipollution devices, 
synthetic fuels plants, down-sizing automobiles, and 
apply the same resources to bring improved technology 
onto line, the American economy can restart economic 
growth — but only if we act quickly. 

If the investment, or rather no nin vestment, policies 
of the past five years continue for the next five years, 
the American economy will die. The LaRouche econo- 
metric team programmed the computer model to simu- 
late economic conditions assuming that the key ratios 
behave as they did during the period from 1975 to 
1979 — a fairly optimistic assumption, considering that 
the Carter administration proposes to make things 
much worse. The result is shown in Figure 14, generated 

298 The Ugly Truth About Milton Friedman 

by the computer program: The U.S. economy will not 
recover from the present depression at any foreseeable 
point in the future. The fall into deep negative numbers 
of the surplus available for productive investment, of 
S', is so steep that the end of that fall projected by the 
computer to occur in 1985 is no longer meaningful. 

Physicists call this condition "thermodynamic 
death" — the point at which a physical system can no 
longer produce the energy required to maintain itself. 
Past a certain point of no return late this year or early 
next year, it will be physically impossible for the econ- 
omy to recover. The main bottleneck interfering with 
plans to build new steel plants is a shortage of basic 
steel. In 1979, America imported more manufactured 
goods than it exported, for the first time since World 
War I. 

Even more dangerous is that the decline in education 
and the rock-drug counterculture are fast destroying an 
entire generation of what should be the most advanced 
labor force in the world. Physical constraints to eco- 
nomic recovery due to depleted capacity and the de- 
struction of the labor force are evident when the econ- 
omy is in a depression. Like Great Britain, the United 
States could limp along in a depressed state for some 
time to come — but never, unless we act now, regain 
international stature as an industrial power. 

The LaRouche-Riemann model also specifies the mini- 
mum survival condition of the U.S. economy: We must 
immediately bring the rate of growth of labor produc- 
tivity back up to the average level during the 1960s, our 
best previous period in the years after World War II. 
This is just barely possible. To achieve it, America 



Figure 14 

Surplus available for 

_| productive investment (S') 

(Current trends) 




Figure 15 

Surplus available for 
productive investment (S') 
(minimal survival) 

Figure 16 

Free energy ratio 

S7(C+V) , 
(minimal survival) 





300 The Ugly Truth About Milton Friedman 

would have to mobilize its population in a way that 
would dwarf the post-Sputnik mobilization for science 
education. If we strictly limited unproductive invest- 
ment and encouraged productive investment through 
selective taxation policies, removed the environmentalist 
constraints from nuclear energy and other high-technol- 
ogy, and won our young generation over to the highest 
standards of science and engineering, we could do it. 

The computer-generated Figure 15 shows that with a 
3 percent annual productivity growth rate, the United 
States will be in the black by early 1983; that is, we will 
be able to meet the depreciation costs of industry and 
rebuild our basic productive capacity. What is most 
unsettling about this projection is how long it will take 
to get out of the trough; under the program that we can 
realistically follow, we will at best have four tough years 
ahead of us. 

By the late 1980s, America would be in an economic 
boom, with an annual potential growth rate of 10 
percent, as Figure 1 6— projecting S'/(C + V) for the 
same period — indicates. A sharp correction in our 
course, based on competent economics, would unlock 
during the next decade the immense and precious 
economic potential that we now stand to lose. 

The discovery of Riemannian hydrothermodynamics 
for economic processes, initiated by LaRouche and 
elaborated by him and his immediate collaborators, is 
the standard for competent economics today. 

This post- 1952 progress in science supersedes, with- 
out invalidating in the least, the earlier, so-called mer- 
cantilist political economy of Colbert, Leibniz, Hamil- 

The Basis of Real Economics 301 

ton, Chaptal, Ferrier, Dupin, Mathew Carey, Friedrich 
List, and Henry C. Carey. Insofar as those predecessor 
developers of the "anti-Adam Smith" American System 
of political economy progressed, they are as reliable 
today as they were in providing the unique policy 
guidance that made the former economic growth and 
greatness of the United States possible. 

Their progress, as typified by Hamilton's 1791 Report 
to Congress on the Subject of Manufactures, succeeded 
in proving the correctness of their policy, and the 
wrongness of Adam Smith's doctrines, to the point of 
exposing the connection between scientific progress and 
rising intensity of per capita productive capital forma- 
tion as the sole generator of the maintenance and 
increase of national gross and per capita wealth. 

Any views explicitly contrary to such "mercantilist" 
policies are wrong to the point of being inevitably evil 
in their consequences. 

The qualitative advantage of LaRouche's advances in 
economics over his American System predecessors is 
that LaRouche's breakthroughs opened the way for the 
efforts of himself and his collaborators to situate energy 
development policy rigorously within the systematic 
analysis of economic processes, and provide the basis 
for defining those directions of technological break- 
through and basic scientific research that lead economic 
development to desirable singularities in the further 
advancement of productivity. 

The scientist whose development encompasses Rie- 
mannian physics of multiply-connected manifolds must 
quickly recognize that our use of the notion of negen- 
tropy flux density has an explicit application in assign- 

302 The Ugly Truth About Milton Friedman 

ing a sense of direction to scientific research. By using 
the fact that physical-science breakthroughs respecting 
the fundamental ordering of processes can be ranked in 
terms of the kind of phase spaces such successful 
discoveries describe, it is feasible today to define break- 
through areas in plasma physics, and in correlated 
matters of biological research that are crucial. By posing 
the kinds of solutions implied by the problems in terms 
of orders of hypothesis, we are implicitly stating which 
breakthroughs will enable qualitative transformations 
in the technology of production. 

For example, the central problem of the frontiers of 
plasma physics today is that of gaining mastery over 
those singularities that yield "anomalous" existences 
analogous broadly to "salitons" within plasma regions. 
The investigation of coherent particle beams verges on 
the same point. 

Therefore, it should be U.S. national policy to foster 
the development of a new generation of physicists 
oriented to the kind of Riemannian physics of a multi- 
ply-connected manifold we have alluded to here, giving 
those physicists the task-orientations coherent with the 
crucial areas of research and development in plasma 
physics and in correlated issues of the biological sci- 
ences. The new technologies derived from advances in 
this direction are to be the aspects of technological 
advancement that must be provided with the relatively 
greatest incentives. 

That point of view among economic policy makers 
toward basic research and development will, in turn, 
foster the kinds of policy makers who will generate 
competent advice on all questions of policy formulation. 

The Basis of Real Economics 303 

Then, why are otherwise serious people still occupy- 
ing themselves with the Stone Age crudities of neo-Nazi 
monetarist Milton Friedman — with these other exciting 
and profitable concerns of real economics to be mas- 
tered for use? 


An interview with Milton Friedman on the Phil Donahue 
Show, April 16, 1980, Cincinnati, Ohio (selections). 

Mr. Donahue: Ladies and gentlemen, I am pleased to 
present the number-one selling book in America, Free 
to Choose. It is number one on the New York Times 
Best Seller List . . . and it is written by the Nobel 
Laureate, a man who will never be accused of making 
economics confusing, a man who has a reputation for 
not only saying what he thinks, but writing what he 
thinks, as he has done in this most important book. 
Please welcome the Nobel Laureate in economics, Mil- 
ton Friedman. . . . 

And you also enjoy the prestige of the Nobel Prize. 
You are the counselor of Presidents and presidential 
candidates. It is really a wonderful spot to be in. You 
know, this is the last thing your mother would expect of 
"my son the economist," to have become a celebrity. . . . 

306 The Ugly Truth About Milton Fri e dman 

Let me see if I can express in very imprecise terms 
and very briefly the core of your statement here, a 
personal statement. We have too much government. We 
are not allowing the free enterprise system to work as 
your most favored historical figure, Adam Smith, sug- 
gested it would work if we just let things alone. We have 
too much government intervention. It is interrupting 
not only the wonderful work that the invisible hand 
6oqs if we leave it alone, but it's also depriving people 
of personal liberties. 

Mr. Friedman: Absolutely. That's a very good sum- 

Mr. Donahue: Okay. Fill in the blanks for me. 

Mr. Friedman: No, no, that's a very good summary. 
There is a very important role for government to play, 
but there's such a thing as too much of a good thing, 
and government has been growing beyond bounds. 
Right now, and to take the simplest measure, the 
government spending at federal, state, and local levels, 
amounts to over 40 percent of the income of the people 
of the country. If you go around and ask people, "Are 
you getting your money's worth for that 40 percent of 
your income which is being spent on your behalf, 
supposedly, by government," there are very few people 
who will say yes. And they are right. We're not getting 
our money's worth. Much of it is — it's not money that 
is being wasted. It's that it's being wasted in a very 
particular sense. You're spending money to do opposite 
things. Here at one place, you're spending — we're 
spending our money to try to propagandize us not to 
smoke. In another place, we're spending our money to 
subsidize the growing of tobacco. Now, what sense does 
it make to spend two streams of money like that and 

An Interview with Milton Friedman 307 

you can go over and over again and find exactly the 
same thing. The government is too big, it's too intru- 
sive, it restricts what we can do. It's becoming our 
master instead of our servant, and we've got to react 
against it and cut it down to size. 

Mr. Donahue: All right. Let's share with the people at 
home just — one of the statements of Adam Smith that 
you refer to in your book. ... By pursuing his own 
interests, that is to say, his meaning the person engaged 
in free enterprise, the person who functions within the 
capitalist, free enterprise system, Adam Smith says, he 
frequently promotes that of the society more effectively 
than when he really intends to promote it. Smith says, 
"I have never known much good done by those who 
affected to trade for the public good." Meaning, spare 
me from the do-gooders. Spare me from the people who 
intend to do good. Smith is saying, if you seek, if you 
honestly seek your own self-interest within the free 
enterprise system, society will be the beneficiary. 

Mr. Friedman: That's right. 

Mr. Donahue; That's a hard thing to — 

Mr. Friedman: I've never known much good done. 
No, I don't have to see it. I've never known much good 
done by those who affected to trade — affected, note he 
doesn't say did trade — affected to trade for the public. 
Now, that word affected is a very important point, 
because you must realize that people don't always 
express their real interest or their real values. They say 
what they think will be attractive to the public in life. 
Let me give you a very simple example right now. 
General Motors, one of our major corporations, has 
come out against the deregulation of the trucking 
industry. The trucking industry today is grossly over- 

308 The Ug ly Truth About Milton Friedman 

regulated. It never should have been regulated at all. 
We never should have had it brought under the Inter- 
state Commerce Commission. It was brought under the 
Interstate Commerce Commission not to protect the 
consumer, but to protect the railroads at the time from 
the competition of trucks when they were first intro- 
duced in the twenties. Right now there is a move 
underway to deregulate trucking the way airlines have 
been deregulated. Nobody doubts that the deregulation 
of airlines was a very good thing for everybody. The 
deregulation of trucking would be an equally good 
thing. There are literally billions of dollars being wasted 
because of the monopoly in trucking. 

Mr. Donahue: But you're talking about fees when you 
talk about deregulation. I assume you would still have 
some monitor on weight. And can the trucking industry 
benefit by using highways that I am paying for and may 
not be using the merchandise — 

Mr. Friedman: They don't, they don't now. You now 
have a gasoline tax which covers the cost of the high- 
ways. It is appropriate to charge for the use of high- 
ways, of course. They ought not to get a subsidy. I am 
opposed to subsidies, and I'm opposed to the opposite 
of excess taxes. But they do now pay for the use of the 
highway through the gasoline tax, and they should 
continue to do so. As to weight limits, that really has 
nothing to do with the ICC. That has to do with the 
capacity of different roads. 

Mr. Donahue: I want to understand you, though, that 
you're not such a purist as to be impractical. You don't 
think anybody's truck should drive over anybody's 
pavement if the construction isn't prepared to accept 
the weight. 

An Interview with Milton Friedman 309 

Mr. Friedman: No, no, of course not. . . . But that 
applies not only to trucks. It applies to private cars. It 
applies to a private recreational vehicle. But what you 
ought to do is to allow anybody who wants to go into 
the business of trucking to do so. You know, there are 
people today who receive $100,000 a year to give 
somebody else permission to use their ICC right to 
carry trucks — to carry freight from one place to an- 
other, people who make a very good living without 
owning a single truck. The total value of these special 
permits, which have been given to trucking enterprises 
to carry freight, amounts, literally, to billions of dollars. 
Now, General Motors and the trucking industry, when 
they come down to Washington and say, "We ought to 
continue regulation," do they say we ought to continue 
regulation in order to promote our interest? Huh-uh. 
What do they say? They say the public will be hurt. 
They are affecting to trade for the public good, but do 
you think they're kidding themselves? 

Mr. Donahue: They're saying, "We don't want the 
wonderful individual people in middle America to be 
hurt." And you're saying that's not what they're — 

Mr. Friedman: They know. They're not stupid. 

Mr. Donahue: They're not Santa Claus? 

Mr. Friedman: They're not Santa Claus. They are 
people who are promoting their interests, and they're 
affecting to trade for the public good because that's the 
way to get things done. Nobody ever goes up to 
Congress and says, "Look, vote me a big bonanza of 
$100,000 because I'm a good man and I deserve 
$100,000 out of the public purse." No. He says, "You 
should subsidize X, Y and Z because the poor middle- 
class Americans, who are the poor people in the slums, 

310 The Ugly Truth About Milton Friedman 

will be benefited by it." So, you have two classes of 
people; the so-called do-gooders; you have the honest, 
sincere people, and they invariably end up being the 
front men for private interests they would never know- 
ingly support. 

Mr. Donahue: What's an example of that? 

Mr. Friedman: An example of that are the nineteenth- 
century Ralph Naders who got the Interstate Commerce 
Commission established. They got the Interstate Com- 
merce Commission established, supposedly, to protect 
the consumer. No, no. They, the do-good reformers, the 
Ralph Nader types, were sincere. They were interested 
in promoting the interests of the consumer, and they 
were complaining that the railroads were monopolies, 
and they were charging too high freight rates, and we 
had to get the government in in order to eliminate that 
exploitation of the consumer. But who benefited from 
it? The ICC was set up. The do-gooder, well-meaning 
reformers went on to their next reform — the railroads 
took over the ICC. And they use the ICC to keep out 
competition, to raise rates rather than lower them. They 
used it in the 1920s to get the control of ICC extended 
to trucking because that was the most dangerous source 
of competition. So those well-meaning reformers, not 
because they were bad people, but they ended up being 
the front men for special interests. And you have that 
over and over again. 

Mr. Donahue: All right. All right. I know you've 
heard these — 

Mr. Friedman: Incidentally, I should point out that 
this little picture on here is Adam Smith. 

Mr. Donahue: Yes. You have the Adam Smith tie 
on. . . . 

An Interview with Milton Friedman 311 

How do you prevent monopoly? You have to have 
constraints on monopoly. And isn't United Air Lines 
too big? And look what happened when they went on 
strike. And should Pan Am absorb National Air Lines? 
We're going to have three airlines when it's all over, 
and we're all going to be beholden to them. Everybody's 
going to be impersonal. You can see it now on the 
airlines. Nobody looks you in the eye anymore, and 
they're giving paper cups in first class. 

Mr. Friedman: Well, personally, I don't see any 
objection to paper cups. . . . But let's go back. The 
problem with the kind of statement you're making is to 
distinguish what's true from what's not true. The plain 
fact is that the main restriction on the number of airlines 
has been the Civil Aeronautics Board. From the time 
the Civil Aeronautics Board took over control of the 
airlines in the 1930s until now — until the deregulation — 
they did not authorize a single new trunk line — 

Mr. Donahue: Because they were owned by the air- 
lines who didn't want more competition. . . . The gov- 
ernment became then an agency to help existing air- 
lines not to have to compete. 

Mr. Friedman: Exactly, exactly. Now what happened 
with deregulation? 

Mr. Donahue: You filled every seat in the airplane. 

Mr. Friedman: And you had new airlines come in. 
The number of airlines has gone up, not down. It is true 
that there are some proposals to merge United and 
National, but there are also ... a bunch of new airlines 
that are coming out. Here's World Airways, whom 
you've never heard of before that's offering these cheap 

So the fact is that the best protection of the consumer, 

312 The Ugly Truth About Milton Friedman 

the best offense against monopoly is — Let me put it 
another way. There's an old saying. "If you want to 
catch a thief, you set a thief to catch him." If you want 
to catch a businessmen monopoly, you set another 
businessman to break it down. You don't send a 
government civil servant after them. The most effective 
antimonopoly legislation you could possibly have would 
be free trade. 

Mr. Donahue: Okay. Now, answer this practical 
question, Professor Friedman. . . . There are some an- 
gry people who would say, "Come down from your 
academic tower, and tell us how we're going to get 
automobile dealers who really care about servicing the 
car, as much as they care about selling the car." Tell us 
how we're going to get automobile dealers who sell us 
safety with the same vigor that they sell us cosmetics. 

Mr. Friedman: Well, if the public at large really 
wanted to buy safety, rather than cosmetics, it would be 
in the self-interest of the automobile dealers to sell them 
safety. You have had some automobile companies that 
have concentrated on selling safety, and they have not 
done very well in the sales. . . . Let me give you a very 
simple example. You have the so-called superba car, 
which is built by the Checker Company that produces 
Checker cabs. They emphasize safety. It's the safest car 
probably there is built in America. They haven't been 
able to sell very many. The problem with your talk is 
that you're not talking in terms of what the consumer 
really wants, as judged by what he's willing to pay for. 
You're talking in terms of what you think he ought to 

Mr. Donahue: So the underpinning underneath your 
statement is, "The stupid public want landau tops and 

An Interview with Milton Friedman 313 

colors, and they buy — They put blue lights on these cars 
in the showrooms, and everybody says, 'Yeah. I want 
one of those.' " Like Pavlov's dog. 

Mr. Friedman: No, no, No, siree. No, siree. I'm not 
going to call them stupid. The public is entitled to buy 
what it wants to buy. Who am I to say whether those 
tastes are better or worse than my taste. Who am I to 

Mr. Donahue: What's your conclusion on a person 
who's more interested in the style of a car than whether 
or not the baby's protected after the collision? That's 

Mr. Friedman: Well, I think he has every right to 
pursue his own objectives and his own tastes, and I have 
every right to try to persuade him he's wrong. But if I 
can't persuade him, do I have the right to force him? 
Don't bring in the baby because that raises another, and 
an extraneous and very difficult issue, 'cause I will agree 
with you. He does not have the right — 

Mr. Donahue: To put a baby like an egg in a crate 
and — 

Mr. Friedman: That's right. That's a different ques- 
tion. The third party effect is different. 

Mr. Donahue: I trust you wouldn't pass a law to 
oblige babies to be constrained in cars? 

Mr. Friedman: No, I probably would not. But I think, 
though, I would — 

Mr. Donahue: You're not very comfortable in saying 
no to the question. 

Mr. Friedman: No, no, no. I'm comfortable. But what 
I would do is, I would say that any parent ought to be 
subject to suit and to being sent to jail, if a child has 
been damaged because of that parent's failing to — 

314 The Ugly Truth About Milton Friedman 

Mr. Donahue: Right. Are you willing to pay the 
prosecutor that it's going to take to develop the evi- 
dence that the mother didn't place the baby properly in 
the car, and the bureaucracy that will accompany the 
enforcement of the law which says that you can go to 
jail if you don't — 

Mr. Friedman: Yes, yes. Unfortunately, I have to pay 
for it. I'm not, as I say, I'm not an anarchist. I'm not an 

Mr. Donahue: So there are limits to your free — Okay. 

Mr. Friedman: I believe that government has a very 
important role, but it's a limited role. And because 
we've been trying to extend the role, we haven't been 
doing what government ought to do as well as it does, 
as it should. We've been doing a terrible job on what 
ought to be the first function of government. The first 
function of government is to protect the nation against 
foreign enemies, and to protect individual citizens 
against assault by their fellow citizens. And we've been 
doing a terrible job on both ends. 

Mr. Donahue: And in that goal you are aligned with 
John Stuart Mill? 

Mr. Friedman: Absolutely. 

Mr. Donahue: Here it is, John Stuart Mill says, "The 
sole end for which mankind are warranted — " This 
looks grammatically incorrect, but stay with us. "Indi- 
vidually or collectively, in interfering with the liberty of 
action of any of their number is self-protection. The 
only purpose for which power can be rightfully exer- 
cised over any member of a civilized community against 
his will, is to prevent harm to other." The only part of 
the conduct of anyone — I'm sorry. "His own good, 
either physical or moral, is not a sufficient warranty." 

An Interview with Milton Friedman 315 

Let's understand that. For my own good, the govern- 
ment cannot pass what would be called forcible action. 
In other words, a person ought to be able to kill 
themselves if they want. 

Mr. Friedman: The right to commit suicide is a 
natural human right. 

Mr. Donahue: It's your life. 

Mr. Friedman: It's your life. 

Mr. Donahue: And you don't want the government 
to spend any money to prevent you from doing that. 

Mr. Friedman: Absolutely, no. Obviously, I, as a 
friend of yours, will try to prevent you. If you were a 
friend of mine and you suddenly got to a bridge and 
were going to jump over, I would certainly rush over 
and grab you and pull you off. And I would — 

Mr. Donahue: But you don't want public money to 
keep me from doing it. 

Mr. Friedman: Well I would go farther. No, no. I 
want to go farther on a personal basis. I would reason 
with you. I would argue with you. But let's suppose 
after I had reasoned with you, after I had argued with 
you, I had failed to persuade you. Do I have the right to 
use force to prevent you from disposing of your own 

Mr. Donahue: I think you do. I think you do. 

Mr. Friedman: I certainly do not. I certainly do not. 
And you do not. And certainly, you do not have the 
right to put your hands in the pockets of other people 
in order to prevent somebody from doing something in 
his own value system. Now, you know, it's an interest- 
ing thing. Every time you bring up issues like this, 
people don't recognize what's been happening. Where 
is the rate of suicide highest? Is it in the countries that 

316 The Ugly Truth About Milton Friedman 

are free enterprise countries, or is it in socialist coun- 
tries? Sweden has the highest rate of suicide of any of 
the Western countries the last time I looked at the 
figures. Maybe they've changed. Why? I don't mean 
why, but it's an interesting thing, an interesting obser- 
vation, that Sweden is one of the most government- 
controlled governments — socialist countries in the 
world. But that hasn't prevented people from commit- 
ting suicide. 

Mr. Donahue: Yes. But the problem with your — 

Mr. Friedman: But look. Take the simpler cases. 
Don't take the— 

Mr. Donahue: This point has to be made. The prob- 
lem with your point is that this is hardly anymore the 
best representative example of what the free enterprise 
system ought to be. So, you, yourself are America's 
severest critic. You think we've blown Adam Smith's 
theory here in America. So, we should have people 
jumping off bridges left and right here, not because it's 
a bad — 

Mr. Friedman: We do. We do. . . . Look at the 
number of — 

Mr. Donahue: Well, but that contradicts the point 
you just made. 

Mr. Friedman: No, no. It doesn't because we have 
become so socialist. Look at the extent to which people 
are — 

Mr. Donahue: Oh, I see. I see. All right. 

Mr. Friedman: — opting out of the world, by going in 
for drugs, by going in for various other activities of this 
kind, which are a delayed form of committing suicide. 
One of the problems of our society is that by having all 
responsibility assigned to the government, we have 

An Interview with Milton Friedman 317 

removed the pressure on individuals to be responsible 
for themselves, to feel that they have a set of values that 
they are entitled to pursue, so that — 

Mr. Donahue: I assume then that if somebody wants 
to smoke marijuana, that's their business, too. 

Mr. Friedman: That's his business. Absolutely. 

Mr. Donahue: Are we going to take that to heroin, 
and addiction? 

Mr. Friedman: Absolutely. Let me go back on that 
one because that's a very interesting thing. Even if on 
ethical principles, you believe it is right to prevent 
somebody else from smoking marijuana, as a matter of 
expediency, it's a terrible mistake. 

Mr. Donahue: And so's jumping off the bridge. 

Mr. Friedman: No, no. I don't mean that. I mean, it's 
a terrible mistake for society to render heroin illegal, 
because that increases the harm which heroin does. Why 
do we have so much crime in the inner cities and in the 
cities? Over 50 percent of it is attributed to crime for the 
sake of acquiring money to buy heroin. 

Mr. Donahue: Because the price — 

Mr. Friedman: Why is heroin so expensive? Because 
it's illegal. We went through this with Prohibition. 
Whether you believe it's right or wrong to prevent 
people from drinking alcohol, we had the experience 
with Prohibition in which we found that it did more 
harm than good. . . . More important, the basic respect 
for law was eroded. Law-abiding people who would 
never ordinarily have broken the law, broke the law in 
order to get a drink. 

Mr. Donahue: Because they knew that the law en- 
forcement agencies could not possibly enforce, with any 
efficiency, the Prohibition laws. 

318 The Ugly Truth About Milton Friedman 

Mr. Friedman: But the reason they couldn't enforce it 
was because it wasn't publicly backed. If 90 percent of 
the public had been in favor of the Prohibition law, you 
could have enforced it. 

Mr. Donahue: But I'm promising you, 90 percent of 
the public right now is in favor of enforcing prohibition 
against heroin. 

Mr. Friedman: And you cannot enforce it. I agree. I 
was understating my case. Even with 90 percent of the 
people, you can't enforce it, and it does vastly more 
harm today because it is illegal, than it would do if it 
were legal. Let me point out for a moment that more 
lives are lost each year through drinking alcohol than 
through heroin. ... If you're going to make the case 
for preventing heroin on the basis of saving lives, there's 
a much stronger case for prohibition of alcohol. 

Mr. Donahue: But there would be some who would 
argue that to relax law enforcement, or to take away 
law enforcement pressure on heroin trade is to ensure 
that heroin deaths will meet and exceed alcohol deaths. 

Mr. Friedman: On the contrary. It would reduce the 
number of heroin deaths. Why would it reduce the 
number of heroin deaths? In the first place, many of the 
deaths come from impure or adulterated heroin, or 
needles that are contaminated. In the second place, as 
we found in Prohibition, the fact that Prohibition 
encouraged alcoholism rather than the opposite. To the 
young people, in particular, it became an adventure to 
go out and get drunk, to go to a speakeasy. Today, with 
heroin illegal, it pays a heroin pusher to create an addict 
because given that it's illegal it's worth his while to 
spend some money on getting somebody else hooked 
because once hooked, he has a captive audience. If 

An Interview with Milton Friedman 319 

heroin were readily available everywhere, it wouldn't 
pay anybody to create an addict because the addict 
could then go anywhere to buy it. You have had 
experience with this. Britain has had legalized — not 
heroin in general, but they have had an arrangement 
under which certified addicts can get heroin from 
physicians on prescription. And it's done very much less 
harm than our system has. So, I have no apologies for 
believing that far less harm would be done to this 
country by legalizing heroin than is now being done by 
trying to enforce heroin prohibition. 

Mr. Donahue: I assume, like the baby in the car, you 
would support legislation prohibiting the sale of heroin 
and other addictive substances to juveniles. 

Mr. Friedman: Well, that's a very hard question. 
There is a different case for juveniles. But whether you 
could really handle the question, that's a question of 
expediency, not of principle. If I thought I could enforce 
it, I would be willing to say that for juveniles. But I'm 
not sure I could enforce it, and I'm not sure when I 
looked into it I wouldn't decide I did more harm than 
good, even there. 

Mr, Donahue: You'll agree that this is the issue that 
lays bare the whole notion of your personal statement, 
and this is where we get to the practical realities of 
sweat and blood everyday life, with parental anxiety. 
Where are my kids? What are those sirens? Who's 
selling what to whom? What are they doing in the car? 
Who's sniffing, smoking, drinking? What is happening 
out there? And for all of the adulation that you've 
received, standing ovations everywhere you go, this is a 
very difficult platform for you to speak from. 

Mr. Friedman: I don't believe so. I don't believe so, 

320 The Ugly Truth About Milton Friedman 

because I believe it corresponds to the real understand- 
ing and interest and beliefs of the vast majority of the 
American people. I think that you have to distinguish 
between the attitudes of the public at large, and the 
attitudes of a relatively small group of people who have 
been trying to persuade the public to have different 

Mr. Donahue: I know that, Dr. Friedman, and — 

Mr. Friedman: Look at Prohibition. . . . Why did you 
get it adopted in the first place? If the people in this 
audience, who are predominantly female, will pardon 
me, it was only adopted because the young males were 
away in France during World War I, and the women of 
the country voted in Prohibition. Now that's neither 
good nor bad. It's a pure statement of historical fact. 

Mr. Donahue: Let's not miss the irony here. The irony 
is that you are the darling of the conservatives. Is there 
anybody left who doesn't think we have too much 
government? And you are as eloquent a spokesman 
against that abuse as there is walking around today. 
You are also on record as supporting the candidacy of 
Ronald Reagan. 

Mr. Friedman: Yes, indeed. 

Mr. Donahue: Do I have to tell you what happens to 
Ronald Reagan's candidacy if he so much breathes 
agreement to the statement you've just made about 

Mr. Friedman: Well, fortunately, one of the great 
virtues of being a college professor is that you can say 
exactly what you believe and what you mean. And I'm 
not running for office. I'd never run for office. I have 
no desire to run for office. And so, I regard it as a great 
luxury that I can be irresponsible. . . . 

An Interview with Milton Friedman 321 

Audience: Since you do like Ronald Reagan, and let's 
say he wins the election and he chooses you as his chief 
economic adviser, what would you do to restore our 
economy back on the right track? And would you put 
us on a gold standard, or could you put us on a gold 

Mr. Friedman: Number one, I have been offered the 
chairmanship of the Council of Economic Advisors in 
the past, and I have refused it, and I guarantee you I 
would refuse it again. ... I believe that I, personally, 
can be more useful outside the government than I can 
inside. It's a very important job. There are many able 
people who can do the job. I don't believe that's the 
way I can use my abilities and my interests most 
effectively. And I want to remain irresponsible. . . . 

But number two. Let me answer your second two 
questions. What measures should the government take 
to try to restore economic health to the United States? 
Let me say first, you're not going to do it overnight. 
We've gotten into our present pickle because of three 
decades of mismanagement of the economy, and we are 
not going to get out of it in six months. But what you 
have to do is, number one, you have to move to cut 
down government spending, to hold down the rate of 
growth of government spending in dollars, and to cut it 
in terms of pursestring power. Number two, you have 
to have a restrained monetary policy, not a shock 
treatment, not a real cut in the quantity of money, but 
to hold down and have a gradual reduction in the rate 
of monetary growth. 

Number three, you have to eliminate as many of the 
regulations that now bedevil the economy as you possi- 
bly can. The most important area there is the energy 

322 The Ugly Truth About Milton Friedman 

area. We have created the energy mess because of 
governmental intervention. The most effective measure 
we could take for both foreign policy and domestic 
policy would be to get rid of the Department of Energy, 
to get rid of this mislabeled windfall profits tax, to let 
the private enterprise economy go to work to produce 
the energy that we need. 

Now, on your last question, I do not believe it is 
either feasible or desirable to establish a gold standard 
under current circumstances. The gold standard served 
well in the nineteenth century. If you could restore the 
conditions of the nineteenth century, namely, a situation 
in which federal government spending was 3 percent of 
national income, I'd be in favor of a gold standard. 


Introduction: Milton Friedman Is a Hoax 

1. Milton Friedman, Freedom to Choose (Chicago: Univer- 
sity of Chicago Press, 1979), pp. 34-35. 

2. Konstandinos Kalimtgis, David Goldman, and Jeffrey 
Steinberg, Dope, Inc. (New York: New Benjamin Franklin 
House, 1978), pp. 106-112. 

3. David Goldman, "Carter Let the World's Biggest Drug 
Bank into the U.S.," War on Drugs (July 1980) 1:22-27. 

4. Milton Friedman, Capitalism and Freedom (Chicago: 
University of Chicago Press, 1962). 

5. The New York Times, October 17, 1976, Financial section, 
p. 16. 

6. Milton Friedman, Essays in Positive Economics (Chicago: 
University of Chicago Press, 1953), p. 319. ) 

Chapter one: What Is Fascist 

1. Burton C. Klein, Germany's Economic Preparations for 
War (Cambridge, Mass.: Harvard University Press, 1951). 

2. Milton Friedman, Studies in the Quantity Theory of Money 
(Chicago: University of Chicago Press, 1956). 

3. Ibid., p. 155. 

4. Ibid., p. 151. 

5. Ibid. 

6. Friedman, Studies in Money, p. 137. 

7. Ibid., pp. 132-135. 

8. Ibid. 

9. H. R. Trevor-Roper, N. Cameron, and R. H. Stevens, 
Hitler's Table Talk (London: Weidenfeld and Nicholson, 
1953), p. 65. 

324 The Ugly Truth About Milton Friedman 

10. Ibid., p. 155. 

11. Ibid. 

12. Konstandinos Kalimtgis, "Hitler's Final Solution," The 
Campaigner (Feb. -March 1975), p. 35. 

13. Ibid., p. 36. 

14. Ibid. 

15. Friedman, Studies in Money, p. 155. 

16. Edward Norman Peterson, Hjalmar Schacht: For and 
Against Hitler (Boston: Christopher Publishing, 1954), p. 

17. Konstantin George, "Planning Crises: From Nuclear 
Disaster to Nuclear War," The Executive Intelligence 
Review (April 1 2, 1980) 7: 1 6-29. 

18. David Goldman, "Carter's Schachtian Budget Proposal," 
Executive Intelligence Review (Feb. 12, 1980) 7:6-8. 

19. Peterson, Schacht, p. 175. 

20. Ibid., p. 170. 

21. Friedman, Essays in Economics, p. 135. 

22. Peterson, Schacht, p. 172. 

23. Jacques Rueff, The Age of Inflation (Chicago: Regnery, 
1964), p. 68. 

24. As quoted in Kalimtgis, "Hitler's Final Solution." 

25. Friedman, Studies in Money, p. 155. 

26. Rueff, Age of Inflation, p. 12. 

27. Jacques Rueff, The Monetary Sins of the West (New 
York: Macmillan, 1972), p. 53. 

28. The New York Times, October 17, 1976, Financial section, 
p. 16. 

29. Friedman, Essays in Economics, p. 14. 

30. Milton Friedman, Milton Friedman's Monetary Frame- 
work: A Debate with His Critics (Chicago: University of 
Chicago Press, 1974), p. 27. 

31. Ibid., p. 3. 

32. Ibid., p. 18. 

33. John Maynard Keynes, 77?? General Theory of Employ- 
ment, Interest and Money (New York: Harcourt, Brace 
and Co., 1964), p. 131. 

34. Friedman, Studies in Money, p. 83. 

35. Ibid., p. 34. 

36. Ibid., p. 46. 

Notes 325 

37. Milton Friedman and Anna Jacobson Schwarz, A Mone- 
tary History of the United States 1867-1960 (Princeton, 
N.J.: Princeton University Press, 1963), p. 700. 

38. Friedman, Monetary Framework, p. 38. 

39. Friedman, Studies in Money, p. 233. 

40. John Kenneth Galbraith, Money: Whence It Came, Where 
It Went (New York: Houghton Mifflin, 1975), pp. 343- 

Chapter two: Rueff versus Friedman 

1. G. R. Taylor, ed., Hamilton and the National Debt (Bos- 
ton: D. C. Heath, 1950). 

2. Jacques Rueff, Complete Works, vol. Ill, chapter 3. This 
and other quotations from Rueff in this chapter are drawn 
from soon-to-be-published translations of Rueff s work 
by the Lehrman Institute in New York City, which has 
graciously permitted their use. For purpose of location, 
the volume and chapter numbers in the forthcoming 
complete works of Rueff are given. 

3. Ibid. 

4. Ibid. 

5. Ibid. 

6. Ibid. 

7. Ibid. 

8. Ibid. 

9. Rueff, Complete Works, vol. Ill, chapter 4. 

10. Rueff, Age of Inflation, p. 21. 

1 1. Friedman, Essays in Economics, p. 135. 

12. Jacques Rueff, The Gods and the Kings (New York: 
Macmillan, 1973), p. 193. 

13. Quoted in Jacques Cheminade, "Friedrich List und die 
Neue Weltwirtschaftsordnung," Internationale Bulletin, 

14. Ibid., p. 14. 

15. The authors are indebted to research conducted by Susan 
Johnson of the Executive Intelligence Review for the real 
storv of the Marshall Plan. 

326 The Ugly Truth About Milton Friedman 

16. Immediately after the war, America faced the predictable 
sort of shortage of almost all forms of capital goods for 
civilian production. Conventional economic wisdom was 
that any export of these goods to Europe would represent 
a sacrifice to the American economy, and, therefore, that 
the Marshall Plan should foster European self-sufficiency. 
This argument held true only under the assumption that 
America did not require a vast, basic renewal of industrial 
capacity that dated back to the 1920s, the sort of renewal 
that Germany and Japan had to undertake because the 
war had obliterated their existing industry. In this circum- 
stance the roots of America's 1960s economic decline are 

17. Friedman, Essays in Economics, pp. 157-203. 

18. Ibid., p. 202. 

19. Ibid., p. 200. 

20. Papers and Proceedings of the 80th Annual Meeting of the 
American Economic Association. Wisconsin, 1968, p. 365. 

21. Reported by former Nixon aide William Safire in his 
memoir Before the Fall (New York: Doubleday, 1975). 

22. Rueff, Monetary Sins of the West, p. 91. 

23. Ibid., p. 40. 

24. Ibid., p. 44. 

25. Ibid., p. 96. 

26. Ibid., p. 41. 

27. Ibid., p. 44. 

28. Ibid., p. 45. 

29. Papers, American Economic Association, p. 366. 

30. Since 1970, the Eurodollar market, or the deposits of 
dollars held in banks outside the United States, principally 
in London and the Caribbean, has grown from less than 
$100 billion to $1.2 trillion. The market turns over, that is, 
the total volume changes hands, about every two weeks. 
The Western European monetary authorities have for 
some years called for some form of controls on this 
market, which operates without any official scrutiny to 
speak of. 

For an account of the 1773 crisis, see David Goldman, 
"How the City of London Got Through the Revolution- 
ary War Crisis," in New Solidarity, December 15, 1977. 

Notes 327 

31. Employing the LaRouche-Riemann computer model, Dr. 
Steven Bardwell has demonstrated the existence of an 
optimum level of capital transfer from the industrial to 
the developing countries. 

32. Lyndon LaRouche, How the International Development 
Bank Works (New York: Campaigner Publications, 1975). 

33. Ibid. 

34. Linda Frommer, "How British Jacobinism Destroyed the 
French Revolution," New Solidarity, June 11, 1977. 

35. Only one American economist upheld RuefTs position. In 
a series of public debates with Columbia University 
Economics Department chairman C. Lowell Harriss, a 
collaborator of Friedman, Queens College economist 
Abba Lerner, and others, LaRouche warned that the 
August 15 decision would steer the United States into 
depression. "They're a bunch of cowards," LaRouche 
said of the Nixon administration. "If they had any guts, 
they would have devalued the dollar against gold" — 
Rueff s proposal— "instead of floating," that is, letting 
the value of the dollar fluctuate arbitrarily. "But they did 
exactly what the British did with sterling in 1931, and it's 
going to have the same results." 

36. Richard Nixon, Memoirs (New York: Grosset and Dun- 
lap, 1978), p. 477. 

37. According to Safire's account of the Camp David meeting 
that produced the August 15 decision, Nixon acted in fear 
of Reuss on that issue. 

Chapter three: The Fraud of 
Free Enterprise 

1 . EHe Halevy, The Growth of Philosophical Radicalism (New 
York: Augustus Kelley, 1949), p. 304. 

2. Kalimtgis et al., Dope Inc. 

3. Disraeli maintained that Shelburne was the most impor- 
tant and least appreciated figure in eighteenth-century 
English politics. He represents Shelburne fictionally in his 
novel Sybil. 

328 The Ugly Truth About Milton Friedman 

4. David Hume, "On Miracles," in Hume, Philosophical 
Works, T. H. Green and T. H. Grose, eds. vol. IV (Berlin: 
Scientia Verlag Aalen, 1964). 

5. Ibid. 

6. Charles W, Hendel, ed. David Hume's Political Essays. 
(New York: Liberal Arts Press, 1953), p. ix. 

7. Christopher White, The Noble Family (New York: Cam- 
paigner Publications, 1977). The Works of Ossian, the Son 
of Fingal (London: 1975). 

8. The first German translation of Ossian appeared in 1768, 
a mere three years after it first was published in London, 
as "The Poems of Ossian, an ancient Celtic poet, trans- 
lated by the Vienna Jesuit Michael Denis." Johann Gott- 
fried Herder, who usually knew better, gave the forgery 
credibility in his classic "Ossian and the Songs of Ancient 
Peoples," in 1773. Herder attacked Denis's translation on 
the grounds that it did not do justice to the "original." 

9. Hume, Philosophical Works, vol. IV, p. 415. 

10. Ibid., p. 421. 

1 1 . See Frederick Ryan, The House of Temple: A Study of 
Malta and Its Knights in the French Revolution (London: 
Burns, Oates, and Washbourne, 1930). 

12. Disraeli, Sybil. 

13. See Ly Siou Y, Les grands courants de la pensee economique 
chinoise dans I'antiquite et leur influence sur la formation de la 
doctrine physiocratique (Paris: Jouve et Cie., 1936). 

14. Virgile Pinot, La Chine et la formation de I'espirit philo- 
sophique en France (Paris: Librairie Orientaliste Paul 
Geuthner, 1932), p. 9. 

15. Goldman, "How the City of London." 

16. Adam Smith, Wealth of Nations (New York: Modern 

17. Alexander Hamilton, Report to Congress on the Subject of 
Manufactures, in Nancy Spannaus and Christopher 
White, The Political Economy of the American Revolution 
(New York: Campaigner Publications, 1977), pp. 375-441. 

18. Adam Smith, The Theory of Moral Sentiments. 

19. According to Jack Beeching, The Chinese Opium Wars 
(London: Hutchinson, 1975). 

20. Goldman, "How the City of London." 

Notes 329 

21. A sort of Scots mafia directed by the intermarried Scots- 
Dutch Hope and Baring families became the leading 
practitioners of the opium trade, including such names as 
Jardine, Matheson, Keswick, and Hutchinson. 

22. Halevy, Growth of Radicalism, p. 75. 

23. Ibid., p. 147. 

24. Frommer, "How British Jacobinism." 

25. Halevy, Growth of Radicalism, p. 30. 

26. Cited in Lyndon LaRouche, How to Defeat Liberalism 
and William F. Buckley (New York: New Benjamin 
Franklin House, 1979), p. 15. 

27. Halevy, Growth of Radicalism, p. 113. 

28. Smith, Wealth of Nations. 

29. This is the closing sentence of Smith's entire work. 

30. The Smith proposal was made first by Shelburne's corre- 
spondent Dean Tucker before the Seven Years' War. 

3 1 . Vincent T. Harlow, The Founding of the Second British 
Empire, 1763-1 793 (Toronto: Longman's Ltd., 1965). 

32. Donald Phau, "The Treachery of Thomas Jefferson," The 
Campaigner (March 1980) 13:4-32. 

33. Kalimtgis et al., Dope, Inc., p. 39. 

34. Ibid., p. 40. 

35. As cited in unpublished report, Kathy Burdman, New 
York City, 1979. 

36. Ibid. 

37. Ibid. 

38. Smith, Wealth of Nations. 

39. Harlow, Second British Empire. 

40. See Kalimtgis et al., Dope, Inc., Part III. 

41. In other words, the East India Company network had 
total command over world trade in Asia, while the City of 
London, by trade war against its rival France, had the 
monopoly of trade financing in Europe. 

42. The relative position of narcotics in international trade 
only fell behind petroleum for the first time in 1973. 
Otherwise, for more than a century the dope trade has 
been the world's largest business, according to the authors 
of Dope, Inc. 

43. John Maynard Keynes, Essays in Biography (New York: 
W.W.Norton, 1951), p. 100. 

330 The Ugly Truth About Milton Friedman 

44. P. Straffa, ed., The Works of David Ricardo (London: 
Cambridge University Press, 1950-1955), vol. II, p. 288. 

45. Keynes, Essays in Biography, p. 84. The other "fairy 
godmother" was Hume's intimate friend, Jean-Jacques 
Rousseau, reports Keynes. 

46. Straffa, Ricardo, p. 287. The Malthus book is contained 
in the Ricardo set with Ricardo 's marginal notes. 

47. Ibid., p. 292. 

48. Rosa Luxemburg, The Accumulation of Capital (London: 
1951), p. 375. 

49. Halevy, Growth of Radicalism, p. 304. 

50. Ibid., p. 50. 

51. Keynes, Essays in Biography, p. 103. 

52. Keynes, General Theory, p. 363. 

53. Henry Carey, Principles of Political Economy (Philadel- 
phia: 1831), vol. I, chapter 2. 

54. Aristotle, The Politics, chapter 1, section 8. 

55. Ibid., chapter 1, section 11. 

56. Criton Zoakos, "Aristotle, Political Warfare, and Classi- 
cal Studies," The Campaigner (Sept.-Oct. 1978) 11:43-73. 

57. Hume, Philosophical Works, vol. IV, p. 318. 

58. In Karl Marx, Critique of Political Economy (Chicago: 
Clark Kerr, 1904), p. 246. 

59. Leland H. Jencks, The Migration of British Capital to 
1875 (New York: Barnes and Noble, 1973), p. 59. 

60. Marx, Critique, p. 246. 

61. Warren Hamerman, "America's Unpaid Debt to Euro- 
pean Republicans," The Campaigner (April 1980) 13:4-19. 

62. Jencks, British Capital, p. 62. 

63. Sir John Clapham, History of the Bank of England (Lon- 
don: Cambridge University Press, 1966), vol. II, p. 185. 

64. Karl Marx, Capital (London: Lawrence and Wishart, 
1972), vol. Ill, p. 556. 

65. Ibid., p. 554. 

66. Allen Salisbury, The Civil War and the American System 
(New York: Campaigner Publications, 1978), p. 16 and 

67. Richard Freeman, "The Specie Resumption Act," New 
Solidarity, July 28, 1980. 

^__ Notes 33 ? 

Chapter four: Oxford Monetarism 
and Hitler's Vienna 

1. Criton Zoakos, Translator's Preface to Plato's Timaeus, 
The Campaigner (February 1980) 13:33-35. 

2. E.g., Cleon Skousen of the Freeman Foundation. 

3. Unpublished report by Laurie Sloane, New York City, 

4. Ibid. 

5. Wesley Clair Mitchell, The Backward Art of Spending 
Money (New York: Augustus Kelley, 1950), p. 183. 

6. Ibid.,'p. 187. 

7. Ibid., p. 181. 

8. Jeremy Bentham, Panopticon. (London: T. Payne, 1791). 

9. Mitchell, Spending Money, p. 187. 

10. Ibid. 

11. Ibid., p. 354. 

12. Ibid., p. 359. 

13. Keynes, Essays in Biography, p. 274. 

14. Ibid., p. 285. 

15. Ibid., p. 284. 

16. Ibid., p. 262. 

17. Ibid., p. 260. 

18. Ibid., p. 279. 

19. Ibid., p. 229. 

20. Mitchell, Spending Money, pp. 164-165. 

21. Ibid., pp. 149, 176. 

22. Edward Pease, The History of the Fabian Society (New 
York: International Publishers, 1926), Appendix I by G. 
B. Shaw. 

23. Ibid., p. 275. 

24. Ibid., p. 276. 

25. Ibid., p. 278. 

26. See Carol White, The New Dark Ages Conspiracy (New 
York: New Benjamin Franklin House, 1980), pp. 64-69 
and passim. 

27. Ludwig von Mises, The Austrian School of Economics, 
(New York: 1939), p. 10. 

332 The Ugly Truth About Milton Friedman 

28. Kathy Burdman, unpublished report, New York City, 

29. Ibid. 

30. Uwe Parpart, "Riemann Declassified: His Method and 
Program for the Natural Sciences," Fusion ( 1 979) 2:24. 

31. Burdman, unpublished report. 

32. Burdman, unpublished report. 

33. Vivian Zoakos of the Society for Platonic Humanism has 
documented this in a paper to be published in The 
Campaigner late in 1980. One of the most uncontestable 
pieces of evidence was reported this year by violinist 
Yehudi Menuhin, who saw during a trip to China a set of 
bells, whose tones spanned four octaves, and which were 
in perfect well-tempered tuning. 

34. White, New Dark Ages, chapter 1. 

35. Mises, Austrian School, p. 25. 

36. Ludwig von Mises, Theory of Money and Credit (London: 
1912), p. 81. 

37. Ibid., p. 21. 

38. Friedrich von Hayek, "Geldtheorie und Konjuncturtheo- 
rie," in Beitrage zur Konjunkturforschung (Vienna: Oester- 
reichisches Institut fur Konjunkturforschung, 1929), no. 
l,p. 87. 

39. Ibid., p. 145. 

40. Ibid., p. 170. 

41. Ibid., p. 189. 

42. Friedman, Essays in Economics, p. 136. 

43. Friedrich von Hayek, The Road to Serfdom (London: 
1944), p. 21. 

Chapter five: Monetarism Invades 

1. Kathy Burdman, unpublished report, New York City, 

2. Ibid. 

3. J. Laurence Laughlin, "Hamilton as a Political Econo- 
mist," The Journal of Political Economy (December 1894) 

Notes 333 

4. Ibid., p. 303. 

5. Mitchell, Spending Money, p. 78. 

6. Ibid. 

7. Thorstein Veblen, The Theory of the Leisure Class (Chi- 
cago: University of Chicago Press, 1899). 

8. Robert Heilbroner, The Worldly Philosophers (New York: 
Simon and Schuster, 1961), p. 199. 

9. Thorstein Veblen, Absentee Ownership and Business En- 
terprise (New York: Viking Press, 1924). 

10. Heilbroner, Worldly Philosophers, p. 194. 

11. Ibid., p. 210. 

12. Ibid. 

13. Mitchell, Spending Money, p. 169. 

14. Ibid., p. 171. 

15. Ibid., p. 160. 

16. Ibid., p. 283. 

17. Wesley Clair Mitchell, A History of the Greenbacks (Chi- 
cago: University of Chicago Press, 1903). 

18. Burdman, unpublished report. 

19. Ibid. 

20. Mitchell, Spending Money, p. 278. 

21. Mises, Austrian School, p. 34. 

22. Wesley Clair Mitchell, Business Cycles and Unemployment 
(New York: National Bureau of Economic Research, 

23. John Kenneth Galbraith, The Great Crash (London: 
Hamilton, 1953), p. 23. 

24. Ibid. 

25. In the Journal of Law and Economics, October 1967. 

26. The actual story of the Crash of 1929, as told here, and 
the correspondence quoted here can basically be found in 
two sources: Stephen V. O. Clarke, Central Bank Cooper- 
ation, 1924-31 (New York: Federal Reserve Board of New 
York, 1967); and Sir Henry Clay, Lord Norman (London: 
Macmillan, 1957). 

27. Rueff, Age of Inflation, p. 9. 

28. Ibid., pp. 10-11. 

29. Ibid., p. 12. 

30. Hayek, Road to Serfdom. 

31. Friedman, Capitalism and Freedom, p. 45. 

32. Ibid., p. 54. 

334 The Ugly Truth About Milton Friedman 

33. Ibid., p. 50. 

34. Friedman, A Monetary History, p. 809. 

35. Ibid., p. 812. 

36. Ibid., p. 810. 

37. Kalimtgis et al., Dope, Inc., p. 216. 

38. White, New Dark Ages, chapter 4. 

Chapter six: The Undead of Economics 

1. Executive Intelligence Review obtained from a member of 
the society its 1978 membership list. This document is not 
public record, but EIR will make it available to bona fide 
researchers. During the preparation of this book, William 
Baroody, Sr. died. 

2. Angelika Beyreuther prepared quotations from Couden- 
hove-Kalergi's works for this and related projects. See 
White, New Dark Ages, p. 377, note 52, for a detailed 
listing of Coudenhove's work. 

3. White, New Dark Ages, chapter 4. 

4. H. G. Wells, After Democracy, Addresses and Papers on 
the Present World Situation (London: Watts and Col., 
1932), p. 24. 

5. In a letter May 10, 1933. 

6. H. G. Wells, The World Brain (London: Methuen and 
Co., 1938), pp. 7-23. 

7. Unpublished letter in H. G. Wells Archives, University of 
Illinois at Urbana. 

8. Unpublished report by Carol Cleary, New York City, 

9. Friedman, Essays in Economics, p. 14. 

10. Mitchell, Spending Money, p. 169. 

11. Wells, World Brain, p. 23. 

12. Marilyn Ferguson, The Aquarian Conspiracy (New York: 
St. Martin's Press, 1980), p. 49. 

13. Hayek, Road to Serfdom, p. 21. 

14. Ibid., p. 235. 

15. Ibid., p. 236. 

16. Charles Markmann, The Buckleys — A Family Examined 
(New York: William Morrow and Company, 1973). 

Notes 335 

17. From the files of the Latin America desk of the Executive 
Intelligence Review. 

18. Unpublished research by James Cleary, New York City, 

19. El Dia, Mexico City, September 8, 1978. 

Chapter seven: The Worst Economist 
in the World 

1. In conversation with a colleague of the authors. 

2. Mises, Theory of Money, p. 81. 

3. Friedman's "technical brilliance," and his Nobel Prize, 
are based on work in price theory, also the title of a 
Friedman volume not cited in this book. The technique of 
price theory reaches the outer extremes of irrelevance to 
the real world. In a nutshell, Marshallian price theory 
assumes that the lower the relative price of an item, the 
more people will have of it, and the higher the price, the 
less of it, all other things being equal — the "downward 
sloping price curve." Most of contemporary economics is 
built around the idea of holding everything constant and 
changing a single price or supply of a single commodity, 
and seeing what happens. The idea that a single process 
could introduce coherence into the mass of such changes 
is out of the realm of Friedman's imagination. Friedman 
is an extremist in the pursuit of incoherence, compared to 
Marshall or traditional price theorists. His first great 
"technical" essay, published in 1947, asserts that you 
cannot hold real income constant and alter a single price, 
because even that one price change will alter real income, 
and so forth. This extraordinary piece of flummery occurs 
in "The Marshallian Demand Curve," in Essays on Eco- 

4. Galbraith, Money: Whence It Came, pp. 279-280. Gal- 
braith, who worked with Friedman directly on the 1930s 
National Resources Planning Council described the con- 
spiracy as follows: "In the summer of 1940, a few days 
after the fall of France, I was summoned to Washington 

336 The Ugly Truth About Milton Friedman 

by [Federal Reserve Research Director Laughlin] Currie. 
Leon Henderson had just been placed in charge of prices 
in the recently revived National Defense Advisory Com- 
mission. It was potentially — and, as matters developed in 
practice — a powerful position. . . . Currie wanted a relia- 
ble disciple to be at hand. I was such. From this came my 
wartime responsibiliity for price control. A couple of years 
earlier, also at Currie's behest, I had directed a large 
review of the public works experience of the 1930s for the 
National Resources Planning Board [where Friedman was 
staff economist at the time]. . . . 

"Later, in the '50s when Currie came under heavy and 
richly unjustified attack as an alleged Communist agent, 
I came across letters from him, long forgotten, urging the 
importance of getting 'our people' into one or another 
agency of the Administration. ... It occurred to me that 
I would have difficulty persuading one of the congres- 
sional committees then searching out Communists of this 

5. Nixon, Memoirs, p. 43. 

6. Lyndon LaRouche, The Power of Reason (New York: 
New Benjamin Franklin House, 1979), p. 137. 

7. The leading figure whom von Hayek looked toward for 
advice on this matter was Walter Lippmann. Lippmann's 
1936 book, The Good Society, proposed "progress by 
liberation," arguing that "the method of human progress 
is to liberate human energies," foreshadowing the 1980 
Aquarian Conspiracy. 

8. Business Week, November 1, 1976. 

9. Friedman, A Monetary History, p. 612. 

10. Ibid., p. 613. 

11. The New York Times, March 31, 1964. 

12. The New York Times, October 25, 1964. 

13. Leonard Silk, Nixonomics (New York: Praeger, 1972), p. 

14. As quoted in Silk, Nixonomics. 

15. Ibid.,p.ll. 

16. National Review, August 16, 1971. 

17. Document of the Organization of American States, 1976. 

18. Business Week, January 11, 1976. 

Notes 337 

19. Ibid. 

20. Business Week. June 2, 1975. 

21. La Prensa, Lima, Peru, January 16, 1977. 

22. Institutional Investor, March 1979. 

23. Ibid. 

24. Kalimtgis et al., Dope, Inc., Part II. 

25. The overthrow of Nicaraguan dictator Anastasio Somoza 
may have reduced this somewhat. 

26. London Economist, March 26, 1980. 

27. London Economist, March 18, 1980. 

Chapter eight: The Basis of 
Real Economics 

1 . For basic treatment of the soliton, see Steven Bardwell, 
"Elementary Plasma Physics from an Advanced Stand- 
point," Fusion (November 1978} 2: 18-42. 

2. Uwe Parpart et al., The Industrialization of India, Execu- 
tive Intelligence Review Special Report (February 1980). 

For in-depth discussion of the LaRouche-Riemann 
model see: Uwe Parpart and David Goldman, "Energy 
Conservation: Building Inflation into the Economy," 
Executive Intelligence Review (March 18, 1980) 7:16-29; 
David Goldman et al., "LaRouche-Riemann model Fore- 
cast: Can the U.S. Economy Survive the Depression?" 
Executive Intelligence Review (May 6, 1980) 7:16-35. For 
a basic theoretical treatment of the principles behind the 
LaRouche-Riemann model see Lyndon LaRouche, "The 
Fallacy of Scalar Elementarily," Fusion (November ] 979) 
3:48-57. For a primer on the science of economics as 
defined in this book see Lyndon LaRouche, Basic Eco- 
nomics for Conservative Democrats (New York: New Ben- 
jamin Franklin House, 1980). 

Beveridge, Sir William, 215 
Biddle, Nicholas, 181 
Biffen, John, 266, 268 
Blavatsky, Madame, 143 
Blavet, Abbe, 103 
Bleiberg, Robert M., 209 
Bohm-Bawerk, 161, 174, 180 
Bolingbroke, Lord, 103 
Bra ndeis, Louis, 171 
Brandt, Karl, 247 
Brandt, Willy, 89 
Brookings Institution, 238 
Buckley, William F., 22, 209, 224, 

227, 247-252; on Friedman, 252 
Bukharin, Nikolai, 180; The Eco- 
nomic Theory of (he Leisure 

Class. 180 
Bulwer-Lytton, Edward, 144-145; 

Rienzi, 144 
Burns, Arthur, 79, 181, 234-236, 

243, 244, 247, 250, 251; on 1952 

recession, 242-243 
Burr, Aaron, 120 
Bush, George, 251 
Butler, Nicholas Murray, 212, 215, 

216, 235 

Campbell, Glenn, 209 
Canning, George, 135 
Cantor, Georg, 15, 158 
Carey, Mathew, 63, 121, 301 
Carey, Henry, 63, 75, 121, 129, 
131,139,160,170, 172,301 

340 The Ugly Truth About Milton Friedman 

Carnegie Foundation, 212 

Carnap, Rudolf, 217, 218 

Carnot, Lazare, 75, 76, 90, 115, 
158, 160 

Carter, James Earl, 9, 21, 24, 35, 
36, 38, 41, 42, 43, 44, 46, 259, 
280, 289, 295, 297 

Carteret, John, 103 

Carver, Lord, 82 

Castro, Sergio de, 255, 258-259 

Cecil, Sir Robert, 211 

Center for Documentation and In- 
formation, (Madrid), 225, 227 

Center for Strategic and Interna- 
tional Studies, 24 

Chamberlain, Houston Stewart, 
155, 156, 166,205,210 

Chamberlain, Neville, 205, 214 

Chaptal, Claude, 75, 76, 77, 244, 

Chatham, Lord, 1 18 

Churchill, Winston, 87, 183, 187, 
190, 195, 198-200, 211, 213, 239- 
240; on Black Thursday, 187 

Clapham, Sir John, 223 

Cleveland, Harlan, 80 

Clive, Robert, 110 

Cliveden Set, 142; also see Round- 

Club of Rome, 71, 125 

Cobden Club, 120, 170, 172 

Colbert, Jean-Baptiste, 62, 71, 75, 

Confucius, 105 

Conti, Prince de Bourbon, 103 

Coolidge, Calvin, 1 72 

Coudenhove-Kalergi, Count Rich- 
ard, 207-214, 218, 220-225, 228, 
235; on the League of Nations, 
211; on the Pan-European 
Union, 210-211 

Council on Foreign Relations 
(New York), 78 

Courant, Richard, 216 


Danton, Georges Jacques, 89, 146 

Dawes, Charles, 198 

de Gaulle, General Charles, 13, 62, 

63, 64, 75, 77-78, 84-85, 87-90, 

deBroglie, Louis, 13, 75, 287 
DeGrelle, Leon, 225 
Debre, Michael, 89 
Descartes, Rene, 100 
Dewey, Thomas, 235 
Dillon, C. Douglas, 86 
Director, Aaron, 237, 242 
Director, Rose, (Mrs. Milton 

Friedman), 237 
Disraeli, Benjamin, 99; on Lord 

Shelburne, 103 
Dewey, John, 172-174, 176, 178- 


on labor power, 1 76 
Dollfuss, Engelberg, 213 
Dorfman, Joseph, 175; on Veblen, 

Dundas, Henry, 112, 122, 123 
Dundas, Robert, 1 12 
Dunne, Peter, 249 
Dupin, Charles, 75, 76, 77, 301; on 

labor, 76 

East India Company, 2, 6, 97, 99, 
108-112, 120-122, 123, 126-129, 
131, 137, 139,253-254,274 

Eden, Anthony, 86 

Edgeworth, F. X., 148, 153 

Edinburgh, 101, 120, 124 

Ehrlich, Simeha, 260-261 

Eisenhower, Dwight D., 86, 90, 
233-235, 242, 243, 247 

Elizabeth, Empress, 95, 155, 156, 
157, 159, 208 

Engels, Frederick, 138 

Index 341 

European Monetary System, 12, 

79, 83-84 
Exter, John, 209 

Fabian Society, 141, !44, 154, 156, 
170, 171, 180 

Federal Emergency Management 
Agency, 35-36,44, 182 

Federal Reserve Board, 35, 36, 50, 
135, 182, 185, 186, 187, 188, 189, 
195, 196, 197,198,199,204,243, 
250, 251 

Ferguson, Marilyn, 221; The 
Aquar ian Conspiracy, 221; on 
H. G. Wells, 221 

Feulner, Edwin J., 210 

Field, Marshall, 171 

Fisher, Irving, 58 

Forbes, William Hathaway, 120 

Forbonnais, 76-77, 104; on wealth, 

Ford, Gerald, 3 

Fowler, Henry, 82, 88 

Franklin, Benjamin, 13, 62, 75, 90, 
104, 1 1 1 

Friedman, Milton, 1, 2, 3, 6, 7, 8, 
9, 10, 11, 12, 13, 14, 15, 17, 19, 
53, 54, 55, 57, 60, 61, 64, 67, 69, 
86, 88,90,91,93,94,95,96,97, 
101, 107, 123, 129, 131, 132, 133, 
139, 140, 141, 142, 144, 148, 153, 
155, 164-65, 166, 170, 178, 179, 
180, 183, 184, 203, 204, 206, 208, 
228, 229, 231, 232, 233, 235-243, 
247, 248, 249, 250, 251, 252, 253, 
264, 265, 266, 268, 273, 274, 275, 

289, 303; Capitalism and Free- 
dom, 6, 51, 221, 237, 241, 248; 
Essays in Positive Economics, 5 1 ; 
Free to Choose, 2, 4, 51, 237, 
305; "The Methodology of Pos- 
itive Economics," 51, 157, 219; 
Milton Friedman's Monetary 
Framework, 51; A Monetary 
History of the United States, 5 1 , 
53, 58, 204; Studies in the Quan- 
tity Theory of Money, 5, 26, 27, 
46, 59, 239; Taxing to Prevent 
Inflation, 238; on Chile, 255-256, 
257; on the Depression, 203; on 
drugs, 3-4; on economic policy, 
9; on economic theory, 52, 53, 
219; on floating rates, 82-83; on 
Henry Simons, 186; on Hong 
Kong, 4; on liberalism, 7; on the 
national purpose, 6; on Nazi 
Germany, 27-28, 29-30; on mon- 
ey, 28, 54-55, 57-58 


Galbraith, John Kenneth, 32, 191- 

193; The Great Crash, 191; on 

the 1929 crash, 191, 192 
Gandhi, Indira, 288 
Garrison, James, 226 
Gauss, Karl, 157 
Gay, Edwin, 182-184 
George III, King of England, 1 10, 

111, 118 
George, Lloyd, 195 
Giscard d'Estaing, Valery, 89, 210 
Goebbels, Joseph, 261 
Goldman, David, 5; Dope, Inc., 97- 

98, 142 
Goldman, Emma, 171 
Goldwater, Barry, 8, 248, 249 
Gomez, Laureano, 227; on Hitler, 


342 The Ugly Truth About Milton Friedman 

Goring, Hermann, 24-25, 29, 30, 
33, 49, 205, 214, 226; on Russia, 

Greenspan, Alan, 3 

Grey, Albert, 143 


Haberler, Gottfried, 247 

Hamilton, Alexander, 12, 13, 16, 
62-63,71,96, 111, 120, 135, 173, 
182, 244, 300, 301; Report on 
Public Credit, 62, 71; Report to 
the Congress on the Subject of 
Manufactures, 14, 106, 301; on 
money, 62-63; on value, 106-107 

Hanotaux, Gabriel, 160 

Hapsburg, Otto von, 207, 208, 210, 
224-225, 228 

Harding, Warren, 197 

Harlow, Vincent, on East India 
Company, 123-124 

Harper, William Rainey, 172 

Harrison, George L., 188; on the 
1929 credit squeeze, 188 

Hastings, Warren, 1 10 

Haushofer, Col. Karl, 142, 205; 
Zeitschrift fur Geopolitik, 213 

Hayek, Friedrich von, 81, 95, 154, 
164-167, 175, 202-203, 208, 215- 
216, 221-224, 235, 239, 242, 247- 
248, 273; Monetary Theory of the 
Trade Cycle, 163; The Road to 
Serfdom, 166, 221, 239; on the 
Depression, 163; on government 
intervention, 166-167, 221-222; 
on liberalism, 242; on the trade 
cycle, 164 

Heller, Walter W., 238 

Helmholtz, Hermann von, 282, 285 

Henri IV, King of France, 90 

Heritage Foundation, 209, 233 

Herzl, Theodore, 95, 210 

Hettinger, Albert J., Jr., 204 

Hirsch, Fred, 85 

Hirst, Josiah, 189-190; on the 1929 
crash, 189-190 

Hitler, Adolf, 2, 9, 10, 19, 20, 24, 
29, 33, 46, 48, 49, 50, 59, 108, 
132, 142, 144, 155, 156, 166, 179, 
182, 191, 198,201,202,205,212, 
213, 214, 222, 227, 229, 235, 239, 
289; Mein Kampf, 142, 213; on 
currency stability, 29 

Hongkong and Shanghai Bank, 5, 
120, 124, 146 

Hook, Sidney, 10 

Hoover, Herbert, 172, 185, 186, 
212, 234 

Hoover Institution, 10, 16, 25, 141, 

House, Colonel Edward, 212 

Howe, Geoffrey, 232, 233, 266, 
268, 272 

Hull House, 170-172, 176,237 

Hume, David, 93, 94, 96, 100-102, 
104, 114, 116, 119,126,132,133, 
137, 149, 178, 179; Treatise on 
Human Understanding, 100; on 
money, 132-133 

Hurtado, Alvaro Gomez, 226, 227, 
229; on drugs, 226 

Hurvitz, Yigal, 261 

Hutchins, Robert, 218; Interna- 
tional Encyclopedia of Unified 
Sciences, 2\%, 219, 220 


Initiatives Committee for National 

Economic Planning, 11, 179, 

International Monetary Fund, 78- 

79, 80-81, 82, 86, 88, 89, 234, 

240, 244 

Index 343 

Jackson, Andrew, 1 
Jardine Matheson, 
Jefferson, Thomas, 
Jevons, William St; 
148, 150-151, 152, 
175,216; The Cot 
Inquiry concernin 
of the Nation am 
Exhaustion of oi 
151-152; Theory 1 
Economy, 351, 15 
Johnson, Lyndon, 8 
Joseph, Keith, 266 
Jowett, Benjamin, , 
146, 148, 152 


Kaldor, Nicholas, 3 
Kalimtgis, Konstai 
Dope, Inc., 97-98 
Germany, 31-32 
Kemmerer, Donald 
Kennan, George, 8C 
Kennedy, John F., 

238, 293 
Keynes, John Mayn 
70, 74, 80, 81, 88. 
152, 199, 204, 23* 
ory, 10; on The 
Kipling, Rudyard, 1 
Klein, Burton, 26-^ 
Germany's Ecom 
lions for War, 2 
Schacht, 26-27 
Klein, John J., 26, 2 
Knight, Frank, 223, 
Kraus, Karl, 156, 1< 
Kuhnwald, Gottfrie 
Krushchev, Nikita, 

Lafayette, Marquis de, 111, 160 
Lamont, Thomas, 195 
LaRouche, Lyndon H., 10, 12, 13, 

14, 15, 22,47,66, 70,73,75, 77, 

78,79,84,88,90, 158,241,289, 

301; Mathematical Economics. 

87; The Power oj Reason, 241; 

on McCarthyism, 241 
LaRouche-Riemann econometric 

model, 15, 280, 287, 288, 291, 

295, 297, 298 
Laughlin, J. Lawrence, 172, 173, 

180, 182, 186 
Lavoisier, Antoine, 1 14 
Lee, Arthur, 120 

Leibniz, Gottfried Wilhelm, 90, 300 
Leontief, Wassily, U, 32, 184, 239, 

Lerner, Abba, 10, 12, 17; The Eco- 
nomics of Control. II; on Hjal- 

mar Schacht, 1 1 
Levi, Edward H., 209 
Lincoln, Abraham, 16, 121, 139, 

160, 180 
Lippmann, Walter, 223 
List, Friedrich, 63, 75, 77, 160, ! 61, 

166, 167, 170, 172, 301 
London School of Economics, 154, 

155, 166, 180-181,216 
Louis XIV, King of France, 75 
Louis, XV, King of France, 1 12-1 13 
Louis XVI, King of France, 1 13 
Ludwig I, King of Bavaria, 156 
Luxemburg, Rosa, 128; on the 

East India Company, 128 


Mach, Ernst, 95, 157-159, 163,216- 
217; Science of Mechanics, 157; 
on science, 157-159 

344 The Ugly Truth About Milton Friedman 

Mackinder, Halford, 142, 156, 166, 

Macpherson, James, 101-102 
Mahler, Gustav, 159 
Malthus, Parson Thomas, 124-125, 

127-131, 136, 152, 163,273; Es- 
say on Population, 125-126, 131; 

Principles of Political Economy, 

126-127; on capital investment, 

Marat, Jean-Paul, 89, 1 14, 115, 146 
Markmann, Charles, 224; The 

Buckleys — A Family Examined, 

Marshall, Alfred, 59, 146, 148, 153- 

155, 177, 178, 181; on money, 

Marshall, George, 79 
Martin, William McChesney, 243, 

Marx, Eleanor (Ave! ing), 147 
Marx, Karl, 104, 138, 147, 154 
McCracken, Paul, 249 
McDowell, Edwin, 209 
McKinley, William, 160, 171, 172, 

173, 243 
Medaris, John B. 234 
Mefo-Institut, 24, 44 
Mellon, Andrew, 172, 197 
Mencius, 105 
Menger, Karl von, 150, 156, 157 

160, 161, 174, 180, 216, 217 

Investigations on Method, 157 

Principles of Economics, 156 
Metternich, Prince Klemens, 145, 

Mill, James, 94-95, 97, 124, 127- 

129, 134; A History of British 

India, 127, 128 
Mill, John Stuart, 6, 70, 94-97, 124, 

136, 137, 154, 314; on credit to 

industry, 137 
Miller, G. William, 41 
Milner, Lord Alfred, 143, 161 

Mises, Ludwig von, 81, 95, 157, 
161, 162, 164, 165, 166, 167, 175, 
227, 228, 235; Omnipotent Gov- 
ernment, 222; on production, 

Mitchell, Wesley Clair, 79, 95, 148, 
149, 150-151, 153, 155, 162, 175, 
176, 177,179, 180,181,182,183, 
184, 185, 186,203,212,215,220, 
234, 235, 236, 237, 239, 242; 
"The Backward Art of Spending 
Money," 177-178; Business Cy- 
cles, 181, 185-186; A History of 
the Greenback, 180; on Bentham, 
149, 150; on labor power, 177; 
on money, 151, 153, 177-178; on 
Thorstein Veblen, 173-174 

Monge, Gaspard, 75 

Mont Pelerin Society, 5, 95, 207- 
237, 242, 266 

Morris, William, 144, 147, 154, 
170-171, 174 

Mosley, Sir Oswald, 199 

Mussolini, Benito, 11, 146, 179, 
198, 205, 213, 229 


Nader, Ralph, 310 

Nagy, Ferenc, 226 

Napoleon, 125 

National Aeronautics and Space 
Administration, 16, 23, 234, 240, 
244, 247, 293 

National Bureau of Economic Re- 
search, 95, 148, 162, 183, 184, 
185, 186,203,204,212,223,234, 
236, 237, 238, 247, 275, 279 

Naumann, Werner, 226 

Necker, Jacques, 1 12, 113 

Newton, Isaac, 149, 157, 158 

Index 345 

Nixon, Richard M., 3, 
83, 86, 89, 90, 240, 2< 
250-252, 273; on \ 
War II America, 240 

Norman, Montagu, 2( 
196, 197, 199, 200, : 
1929 crash, 188, 20 
credit, 196 

Pre-Raphaelite Brotherhood, 95, 
143-145, 175 

Quesnay, Francois, Despotism in 
China, 104; Tableau Economique , 


Order of St. John of Jei 
102, 104, 114, 144-14 
O'Sullivan, John, 232 

Paish, F. W., 238 
Palmerston, Lord, 12( 

Pan-European Union 

148, 167, 207,210, 21 

216, 224, 225 
Pasos, Luis, 228 
Patton, Jacob, 121, 15 

land vs. America, 12 
Pechman, Joseph, 238 
Peel, Sir Robert, 134, 1 
Permindex (Permanent 

Expositions), 210, 22 
Peterson, Edward Nort 

Nazi economy, 33 
Petty, William, 119, 13< 
Pforr, Franz, 145 
Pinochet, Augusto, 2, 

253-255, 259, 264 
Pipes, Richard, 25 
Pitt, William, 99, 111 

118, 125, 133,273 
Plato, 143 

Popper, Karl, 217, 223 
Pope Paul VI, 78, 90; 

rum Progressio, 88 


Reagan, Ronald, 1, 25, 209, 247, 

289, 321 
Rees-Mogg, William, 272 
Reuss, Henry, 36, 90, 136, 252 
Rhodes, Cecil, 143, 156, 171 
Ricardo, David, 6, 14, 74, 94, 96, 

124, 126, 129-137, 139-140, 150, 

163, 173, 177, 178, 181, 266; 

Principles of Political Economy, 

129, 131; on money, 133, 135 
Riemann, Bernhard, 14, 15, 77, 

157, 158, 215, 216, 282, 285, 300; 

The Hypotheses Which Underlie 

Geometry, 285 
Robinson, John, 111 
Rockefeller, John D., 171 
Roll, Sir Eric, 80 
Roosa, Robert U., 86 
Roosevelt, Franklin D., 79, 87, 

Rossetti, Dante Gabriel, 144 
Rostow, Walter, 25 
Rothbard, Murray, 225 
Rothschild, Baron Albert de, 156, 

Rothschild, Evelyn de, 268 
Rothschild, Julie de, 156 
Rothschild, Louis, 210 
Roundtable, 141, 142, 143, 156, 

161, 166, 183, 190, 195; also see 

Cliveden Set 
Rousseau, Jean Jacques, 104 
Rudoff, Crown Prince, 157 

346 The Ugly Truth About Milton Friedman 

Rueff, Jacques, 13, 22, 47, 49, 61- 
64, 66-70, 73-79, 83-85, 90, 91, 
104, 142, 182, 201; The Age of 
Inflation. 48; on Adolf Hitler, 
48; on credit, 84; his emergency 
economic plan, 65-68; on fascist 
economics, 47, 49; on Ger- 
many's 1931 currency crisis, 
202; on gold, 85; on inflation, 
73; on science, 75-76 

Ruskin, John, 94, 95, 141, 142, 
143-147, 154, 156, 160, 170, 171, 
174, 180, 205; on education, 147 

Russell, Bertrand, 53, 217, 218, 223 

Sada, Andres Marcelo, 227, 228 

Saenz, Orlando, 259 

Samuelson, Paul, 8, 101, 248, 249; 
on Friedman, 8, 101, 248-249 

Sartre, Jean-Paul, 89 

Saulnier, Raymond, 242 

Schacht, Hjalmar, 5, 10, 11, 19, 20, 
22, 23,24,25,26,29,31, 32,33, 
35, 36, 38, 43, 44, 45, 46, 48, 49, 
53, 64, 66, 142, 161, 184, 186, 
191, 198, 199,200,201,202,205, 
on German economy, 46, 48 

Schiller, Friedrich, 148 

Schiesinger, James, 25 

Schmidt, Helmut, 210 

Schmoller, Gustav von, 160, 161, 167 

Schdnberg, Arnold, 95, 159 

Schrddinger, Erwin, 287 

Sharpe, Myron E., 1 1 

Shaw, Clay, 226 

Shaw, George Bernard, 144, 146, 
154, 171, 174, 180; Man and 
Superman, 154 

Shelburne, Lord, 89, 99-100, 102- 
104, 108, 110-116, 1J8, 119, 121, 

Silk, Leonard, 249; on 1970 eco- 
nomic crisis, 250-251; on Milton 
Friedman, 51-52 

Simon, William, 3 

Simons, Henry, 164, 186, 203, 223, 
236, 242 

Skorzeny, Otto von, 207, 225, 226 

Smith, Adam, 6, 14, 16, 94, 96, 97, 
100, 101, 104, 110, 112, 114, 115, 
117, 119, 120, 123,124, 130, 173, 
301, 306, 307, 310, 316; Theory 
of Moral Sentiments, 107; 
Wealth of Nations, 102, 103, 105, 
108, 115, 116, 117, 118, 123; on 
colonial policy, 116, 1 17, 118; on 
the East India Company, 123; 
on moral indifferentism, 107; on 
value, 105 

Society of Jesus, 99, 100, 102 

Sombart, Werner, 184; High Capi- 
talism, 184; A New Social Philos- 
ophy, 185 

Speer,' Albert, 29, 30, 3J, 49, 206; 
on arms production, 31 

Stead, William, 171 

Steinberg, Jeffrey, 5; Dope, Inc., 5, 
97, 98, 142 

Stewart, Dugald, 120, 124, 169 

Stigler, George, 209, 235, 241, 242 

Stimson, Henry, 50 

Stobaugh, Robert, 293 

Strauss, Franz-Josef, 207 

Strauz-Hupe, Robert, 247 

Strong, Benjamin, 195, 196, 197, 

Sullivan, Laurence, 111, 112 

Szilard, Leo, 214,215, 218 

Teller, Dr. Edward, 158 
Tennyson, Lord Alfred, 145 

Thatcher, Margaret, 2, 232, 266, 
268, 270, 272 

Index 347 

Volcher, Paul, 1,15, 20, 22, 35-40, 

43, 46, 83, 252, 259, 267 
Voltaire (Francois Arouet), 104 


Wagner, Richard, 101, 144, 154, 
156, 159, 209, 210, 213; Art and 
Revolution, 154 

Warburg, Max, 50, 186, 210, 211, 

Warburg, Paul, 50, 173, 182, 185, 

Washington, George, 12, 119 

Webb, Beatrice, 144, 170, 171, 174, 
179, 180, 199 

Webb, Sidney, 144, 154, 155, 171, 
174, 180, 199 

Wedekind, Frank, 95 

Wells, H. G., 214, 218, 219, 220, 
221, 223; The Open Conspiracy: 
Blueprints for a World Revolu- 
tion, 221,223 

White, Carol, 205; The New Dark 
Ages, 142 

Wilde, Oscar, 143, 144, 147, 154; 
The Soul of Man under Social- 
ism, 147, 154 

Wilson, Woodrow, 182, 212 

Wiseley, William, 82 

Witte, Count Sergei, 160 

Wittgenstein, Karl, 53, 159 

World Bank, 125 

Yergin, Daniel, 293 
Young, Owen, 212